Effective January 29, 2016, companies will be able to raise capital using crowdfunding, as mandated by the JOBS Act. It comes with a host of regulations that must be followed. The following are highlights of the new regulations.
Crowdfunding 101 – Quick Facts
- Companies can raise $1 million through crowdfunding in a 12-month period;
- Can advertise your offering with tombstone type information only in all types of media;
- Must offer your securities through a registered broker-dealer OR funding portal.
Who Can Invest
Individual investors, including unaccredited investors, can invest in 1 12-month period in one or more crowdfunding offerings, the aggregate amount of:
- If either annual income or net worth is less than $100,000, the greater of:
- 5 percent of the lesser of annual income or net worth.
- Of both annual income and net worth are equal to or more than $100,000 then:
10% of the lesser of annual income or net worth; and
During any 12-month period the aggregate amount of securities purchased by investor cannot exceed $100,000.
Investors generally can’t sell their securities for one year.
Company Disclosure Requirements
To rely on this exemption, companies must file certain information with the SEC and provide the information to investors and the funding portal or broker-dealer facilitating the offering. The following are highlights:
- The price of the securities (or the method for determining the price);
- The offering amount;
- The deadline to reach the offering amount;
- Is the company accepting investments in excess of its targeted offering amount;
- Financial disclosure based on the company’s tax returns reviewed by either (depending upon if a company raised more than $500,000 in a 12-month period:
Review by an independent public accountant, or
Audited financial statements by an independent auditor.
- Description of the business and use of proceeds;
- Information on officers, directors and owners of 20%or more of the company; and
- Related party transactions.
Companies depending upon the crowdfunding exemption must provide on going information:
- File annual reports with the SEC; and
- Provide the annual reports to their investors.
Who Can’t Use the Crowdfunding Exemption
- Non-US companies;
- Exchange Act reporting companies;
- Companies that failed to comply with the annual Crowdfunding reporting requirements during the two years immediately preceding the filing of the offering statement;
- Companies with no specific business plan;
- Companies who plan to merge or acquire an unidentified company(ies);
- Companies subject to disqualification under Regulation Crowdfunding; and
- Certain investment companies.