“Crowdfunding” has historically referred to a process whereby individuals or companies raise money to fund projects or ideas. Funders donate money with no expectation of a return other than a token gift. Kickstarter and GoFundMe are examples of this type of crowdfunding.
In April 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”). The purpose of the act was to streamline the process of raising capital for small businesses and startups using the Kickstarter-type model but with the added feature of allowing for a return on investments.
On October 30, 2015, the Securities and Exchange Commission (“SEC”) adopted Regulation Crowdfunding, the rules for raising capital under the JOBS Act. The effective date of Regulation crowdfunding was May 16, 2016.
The rules:
- Require all crowdfunding transactions to take place online through an intermediary registered with the SEC, either a broker/dealer or a funding portal;
- Permit a company to raise a maximum aggregate amount of $1,070,00.00 in a 12-month period;
- Set limits on the amounts that individuals may invest over a 12-month period; and
- Require issuers to file disclosure on Form C.
The amounts that an individual may invest in any 12-month period are determined with reference to the individual’s annual income and net worth.
- If annual income or net worth is less than $170,000.00, the amount that may be invested is the greater of $2,200.00 or 5% of the lesser of annual income or net worth.
- If annual income and net worth each exceed $107,000.00, the amount that may be invested is 10% of the lesser of annual income or net worth, but in no case more than $107,000.00.
Disclosure on Form C must include:
- Information about the officers, directors and owners of 20% or more of the issuer;
- A description of the business of the issuer and the use of the proceeds of the funding;
- The price of the security or a description of the method by which the price was determined;
- The target amount of the offering and the deadline by which the target must be reached;
- Whether the issuer will accept investments in excess of the target amount;
- Descriptions of certain related-party transactions (typically, arrangements between an officer, director or owner and a friend or relative or entity owned or controlled by the officer, director or owner);
- Discussion of the issuer’s financial condition and financial statements (Requirements for financial statements are based on the amount raised by the issuer under Regulation Crowdfunding within the prior 12 months.)
Additional Requirements:
- Issuers must disclose changes to the offering statement and provide progress updates after reaching 50% and 100% of the funding target.
- Issuers must file annual reports with the SEC with information similar to that contained in the Form C disclosure.
- Advertising and promotion of the offering by the issuer is limited to notices that direct prospective investors to the intermediary’s platform.
- Securities acquired pursuant to a Regulation Crowdfunding offering generally may not be resold for one year.
All of this may seem like a lot, but an offering under Regulation Crowdfunding is a far less onerous process than registration under the Securities Act of 1933. With careful planning and attention to the details of the regulations, crowdfunding is a viable option for a small business.
Contact me for more information.