After much anticipation, the SEC adopted final crowdfunding rules on October 30, 2015.
These rules (called Regulation Crowdfunding) will become effective 180 days after they are published in the Federal Register.
Here are some helpful resources for more information:
- SEC press release and a summary of these new rules
- Background commentary from SEC Chair Mary Jo White
- Final rules
- Summary of Regulation Crowdfunding by VentureBeat
Our thoughts
There is a lot of optimism regarding these crowdfunding rules and their potential positive impact on capital raising, and there is certainly a high degree of good intent behind these rules.
We continue to doubt, however, that crowdfunding will have a major impact on capital raising for many companies because of the associated regulatory requirements and high costs (particularly the costs associated with audited financial statements and the use of an intermediary).
- The most important components of these crowdfunding rules are:
- Issuers can raise up to $1 million during each 12 month period in crowdfunding offerings.
- There are substantial limits on the amounts that an investor can invest. If an investor has less than $100,000 in either annual income or net worth, that investor can only invest the greater of $2,000 or 5 percent of their annual income or net worth in all crowdfunding transactions over a 12-month period. Investors whose annual income and net worth are both at least $100,000 can invest up to 10 percent of their annual income or net worth in all crowdfunding transactions over a 12-month period. It is important to note that during this 12-month period, the aggregate amount of securities sold to an investor in all crowdfunding transactions cannot exceed $100,000.
- Certain entities, such as Exchange Act reporting companies, non-U.S. companies, “blank check” companies and certain disqualified companies, are not eligible to use Regulation Crowdfunding.
- Issuers must submit detailed reports to the SEC and to investors in connection with each crowdfunding transaction and also annually. These reports must contain, among other things, information about the issuer’s officers, directors and principal shareholders, related party transactions and the use of proceeds. Audited financial statements (prepared by an independent accounting firm) are generally required, although there is some relief from the audit requirement for certain issuers who are utilizing Regulation Crowdfunding for the first time. In these cases, the financial statements must be reviewed. The issuer’s principals may be required to disclose certain personal financial information.
- Securities purchased in a crowdfunding transaction can generally not be resold for one year.
- Holders of securities obtained in a crowdfunding transaction will generally not be counted in the determination of whether an issuer must register under Section 12(g) of the Exchange Act.
- An intermediary (called a funding portal) must be used. The requirements for an intermediary under Regulation Crowdfunding are complex and contain numerous important provisions and restrictions that are specific to crowdfunding transactions.
The SEC’s press release also described some interesting proposed SEC rule amendments that may stimulate capital raising:
- Changes were proposed to Rule 147 (intrastate offerings). This rule generally permits intrastate offerings without requiring concurrent federal registration. Among other things, in the amended rule the definition of an intrastate offering would be clarified. Issuer eligibility requirements would be eased in response to issuers’ perceptions that these requirements are too strict. The Rule 147 exemption would be available for offerings that are registered in a state or that are subject to a limit of $5 million per 12-month period under state law. Certain investment limitations would also be imposed.
- The offering limit under Rule 504 of Regulation D is proposed to be raised to $5 million per 12 months from its current $1 million. Certain bad actors would also be excluded from participation in Rule 504 offerings. This amendment could give small companies another viable alternative for capital raising.
Keep your eye on these proposed amendments as they may be helpful to the capital raising process, especially for smaller companies.
