If you have been considering raising money via crowdfunding for your startup or small business, you may already know that this has been somewhat of a gray area in securities law. Back in 2012, Congress passed Title III of the Jumpstart Our Business Startups Act (“JOBS Act”). Since then, the Securities and Exchange Commission (“SEC”) has been wrestling with how to regulate this method of raising capital. Entrepreneurs and investors have been waiting for the SEC to unveil the process and requirements.
The wait is over but, unfortunately, it’s not good news for entrepreneurs. The law itself allowed for small businesses raising a limited amount of capital to adhere to less stringent and costly reporting and disclosure requirements, relative to traditional public offerings. However, as feared, the SEC has chosen to take advantage of only some of the latitude allowed in the law.
On October 30, 2015, the Commission adopted its long-anticipated regulations to govern the offer and sale of securities under Section 4(a)(6) of the Securities Act of 1933, as amended (“Securities Act”), and includes provisions relating to the regulation of funding portals and broker-dealers who facilitate the offer and sale of securities in crowdfunding transactions. For more background on crowdfunding and Title III, read our post from last year Crowdfunding for Business and Impact of Government Regulation.
Impact of Final SEC Rules for Raising Money via Crowdfunding
If crowdfunding has been part of your plan, it’s critical that you understand the qualification and reporting requirements before proceeding. We have outlined a few of the fundamental considerations below:
- In order to avoid public registration requirements, offerings must not exceed $1 million on an aggregate basis in a 12 month period, so long as the offering is conducted through a broker-dealer or funding portal. For some entities, there are further restrictions, but no offering may exceed this limit without triggering the registration requirement.
- A limited amount of securities can be sold to a single investor during a 12 month period. Those limits vary depending upon the financial position of the investor.
- The issuer must disclose detailed information about its business, its officers, intended purpose of the funds, and more, to both the SEC and its intermediary (so it can further provide to investors).
- The issuer is subject to ongoing reporting requirements, including financial statements.
- Advertising the securities offering is prohibited, except to direct prospective investors to the funding portal.
While these qualification and reporting requirements are relaxed, relative to traditional public offering registration rules, many entrepreneurs will conclude that this method of raising capital will not be worth the effort and expense. The details of how the offerer must satisfy each requirement spells out some fairly onerous obligations.
Each circumstance should be evaluated thoroughly.
In order to help owners and entrepreneurs properly evaluate the potential of raising money via crowdfunding, we will publish a whitepaper providing more details shortly. In the meantime, we recommend reviewing this Fact Sheet available at SEC.gov for information regarding these new rules.