Raising money is hard work, but the new equity crowdfunding rules (Regulation CF) should make it easier for the entrepreneur with a compelling story to raise capital online. The Securities and Exchange Commission (SEC) has implemented Title III of the JOBS Act making it possible for smaller companies to offer and sell securities through crowdfunding. The new rules become effective May 16, 2016.
Equity crowdfunding online has been on the rise over the years, but equity-based crowdfunding for projects seeking unaccredited investors will be allowed for the first time. These new crowdfunding rules will give small businesses and start-ups an additional avenue to raise capital from “ordinary” investors, and permit everyday people to invest in securities-based crowdfunding transactions, subject to certain investment limits. The rules also impose disclosure requirements on issuers for certain information about their business and securities offering, and require issuers to raise capital through an SEC-registered intermediary, either a broker-dealer or a funding portal.
The new rules may see a significant reduction in the costs of raising capital through equity crowdfunding, in that:
The new crowdfunding rules limit the amount of money a company can raise, or an individual investor can invest, in a 12-month period, as follows:
Non-US companies are not eligible to use this crowdfunding exemption.
Companies opting to rely on these rules must file certain information about their businesses with the SEC and make them available to investors. These disclosures are required of companies to help provide transparency to the investors. The information to be disclosed include:
A company relying on these new rules will be required to conduct its offering exclusively through one funding portal at a time.
Each of these intermediary platforms will be required to, among other things:
Because a crowdfunding portal is not registered as a broker-dealer, it cannot solicit securities purchases, offer investment advice, or handle investor funds or securities. In addition, these crowdfunding platforms are prohibited from engaging in certain other activities, such as:
Except for a tombstone ad, no solicitation of a crowdfunding offering is permitted outside the intermediary’s platform. A crowdfunding offering will not be integrated with another offering made concurrently by the issuer, but could impact whether conditions to a concurrent exempt offering have been satisfied. For example, a company conducting a private placement and crowdfunding offering concurrently would have to determine that private placement investors hadn’t been solicited by the crowdfunding.