SEC Adopts Rules to Permit Equity Crowdfunding for Non-Accredited Investors

On April 5, 2012, President Obama signed Jumpstart Our Business Startups Act (JOBS Act) into law with the intent of helping small businesses and startups raise capital through several changes to long-standing securities regulations, including a change that would allow companies to raise equity from both accredited and non-accredited investors through a publicly solicited crowdfunding campaign (Title III of the Jobs Act). However, it took over three years for the Securities Exchange Commission (SEC) to finally adopt the rules that will permit companies to offer and sell securities through crowdfunding. The new rules also include amendments to existing Securities Act rules to facilitate intrastate and regional securities offerings. Final rules include:

• Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
• If either their annual income or net worth is less than $100,000, the investor cannot invest the greater of $2,000 or 5 percent of their annual income or net worth;
• If both their annual income and net worth are equal to or more than $100,000, the investor can invest up to 10 percent of their annual income or net worth; and,
• During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

A company relying on the rules would be required to conduct its offering exclusively through one intermediary platform at a time.

Companies that rely on the recommended rules to conduct a crowdfunding offering must file certain information with the SEC and provide this information to investors and the intermediary facilitating the offering. Items that must be disclosed include:

• A description of the business and the use of proceeds from the offering;
• Information about officers and directors as well as owners of 20 percent or more of the company;
• A discussion of the company’s financial condition; and,
• A description of the business and the use of proceeds from the offering.

At the time of solicitation, the company must make public:

• The price to the public of the securities or the method for determining the price;
• The target offering amount;
• The deadline to reach the target offering amount; and,
• Whether the company will accept investments in excess of the target offering amount.

The company also is required to provide financial statements to investors, the intermediary, and the SEC.

However, contrary to speculation leading up to the release of these new rules, the SEC will not require companies that raise between $500,000 to $1 million to have a financial audit conducted by an independent auditor – if it is the company’s first round of equity crowdfunding. Instead, they must provide interested parties with a reviewed financial statement. For companies that raise multiple rounds of equity through crowdfunding or a company that has undergone a financial audit, they must provide those audited financial statements to interested parties. 

The new rules also outline the requirements for crowdfunding platforms. Under the new rules, a portal must register with the Commission on the new Form Funding Portal, and become a member of a national securities association – Financial Industry Regulatory Authority, Inc. (FINRA). Activities that crowdfunding sites must undertake include, but are not limited to:

• Providing investors with educational materials;
• Taking certain measures to reduce the risk of fraud;
• Making information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
• Having a reasonable basis for believing an investor complies with the investment limitations; and,
• Providing investors notices.

Under the SEC rules, crowdfunding platforms cannot have a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions, and cannot host campaigns by companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns.

The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective January 29, 2016.Read the Press Release…