This document is provided for informational purposes only. The contents of this document do not constitute legal advice.
What is the JOBS Act?
The Jumpstart Our Business Startups Act (JOBS Act) was passed with bipartisan support by Congress and signed into law by President Obama in April 2012. The JOBS Act eases the regulatory burdens on smaller companies and facilitates capital formation.
The JOBS Act currently enables businesses to solicit funding from the general public – although only SEC-defined Accredited Investors are allowed to invest at present. On October 30, 2015, the SEC adopted final rules (“Regulation Crowdfunding”) which will expand investment opportunities to non-Accredited Investors by allowing companies to offer and sell securities through crowdfunding. The new SEC 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.
What is crowdfunding?
Crowdfunding is an alternative, evolving method of financing a company or venture by raising small amounts of capital from a large number of individuals, primarily through the Internet.
Crowdfunding contrasts with traditional corporate finance routes where companies seek substantial sums from a small number of investors, often with the assistance (for substantial equity ownership , fees, commissions) of angel investors, venture capital firms or securities broker-dealers.
The funding campaign and transactions are typically conducted online through dedicated crowdfunding sites, often in conjunction with social networking sites websites like Facebook, Twitter and LinkedIn. This approach taps into the collective efforts of a large pool of individuals and leverages their networks for greater reach and exposure.
Crowdfunding sites are sometimes referred to as “platforms” because they provide a venue for all aspects of a fundraising effort, such as creation of the public interface, campaign and project tracking, a payment mechanism and disbursement of funds.
What is SEC Regulation Crowdfunding?
Under the Regulation Crowdfunding rules, eligible companies are permitted to raise up to $1 million in capital in any 12-month period by offering securities through SEC-registered intermediaries in crowdfunding transactions on the Internet.
What types of companies are eligible to use the Crowdfunding Rules to solicit investment from the public?
U.S. companies (issuers) will be able to offer and sell securities to the public without registration with the SEC. The exemption will not be available to reporting companies under the Securities Exchange Act of 1934 (Exchange Act), certain investment companies, blank check companies or companies that have indicated that their business plan is to engage in a merger or acquisition with an unidentified company, companies that have failed to comply with annual reporting requirements under Regulation Crowdfunding within two years prior to a proposed offering, and issuers that are disqualified under “bad actor” provisions.
What are the restrictions on investing in a crowdfunded offering?
The crowdfunding rules limit the aggregate amount any person may invest in all crowdfunding offerings in any 12-month period. An individual investor with an annual income or net worth of less than $100,000 will only be permitted to invest up to the greater of (1) $2,000 and (2) 5 percent of the lesser of his or her annual income or net worth. If an investor has an annual income and net worth greater than or equal to $100,000, he or she may invest up to 10 percent of the lesser of his or her annual income or net worth. Regardless of an investor’s annual income or net worth, an investor will not be permitted to purchase more than $100,000 worth of securities in offerings under Regulation Crowdfunding in any 12-month period.
What information are companies which use the crowdfunding rules required to disclose to investors?
The crowdfunding rules outline disclosure requirements that issuers must satisfy in connection with an offering and in annual reports, which an issuer will be required to file after completing an offering in reliance on the crowdfunding exemption.
In connection with a crowdfunding offering, an issuer will be required to file a “Form C” with the SEC and provide to potential investors and the applicable intermediary disclosure regarding the issuer and the offering, including the price for the security (or the method for determining the price), the target offering amount (as well as the deadline for reaching the target, and whether the issuer will accept investments in excess of the target), information relating to: (1) the use of proceeds from the offering; (2) the officers, directors and owners of 20 percent or more of the company; (3) related party transactions; (4) the company’s business and financial condition; and (5) the company’s financial statements, which must be audited in certain circumstances.
What financial information must companies provide?
The financial statements provided to the SEC, investors and the applicable intermediary in connection with an offering under the crowdfunding rules must: (1) be prepared in accordance with US generally accepted accounting principles; (2) cover the two most recently completed fiscal years of the issuer (or shorter period since the inception of the issuer, if applicable); and (3) be certified (and accompanied by tax returns), reviewed or audited, depending upon the aggregate amount of securities offered by the issuer during the preceding 12-month period.
What types of intermediaries may companies use in transactions relying on the crowdfunding rules?
Companies relying on the crowdfunding exemption (from registering the offering, as a “public offering” with the SEC) will be required to offer their securities through a registered SEC intermediary, which may be an online “funding portal” or a broker dealer.
Issuers will only be entitled to register with one intermediary in any 12-month period. The funding portals will be required to register with the SEC, utilizing Form Funding Portal and become members of the Financial Industry Regulatory Authority (FINRA), which has also proposed a set of seven rules and related forms that will govern the registration of crowdfunding portals with FINRA.
Intermediaries will be subject to various regulatory requirements, many of which impose a “gatekeeping” function on the portals. Specifically, crowdfunding portals will be required to furnish educational materials to prospective investors, provide communication channels for the “crowd” to discuss offerings, take measures to reduce fraud (including measures to form a reasonable basis for believing that an issuer complies with Regulation Crowdfunding), make information that a company is required to disclose available to the public on the portal’s platform throughout the offering period and for a period of at least 21 days before any security may be sold in the offering, and establish a reasonable basis for believing each investor complies with applicable investment limitations.
How long must an investor who purchases securities hold his or her investment?
Holders of securities sold in a crowdfunding offerings will generally be required to hold all securities purchased for a least one year before engaging in sales. Holders of securities sold under the crowdfunding rules will not be counted for purposes of determining whether an issuer is required to register under Section 12(g) of the Exchange Act, so long as the issuer is current in its annual reporting, has less than $25 million in total assets as of the end of its most recently completed fiscal year and engages a transfer agent.