In September, new rules went into effect allowing general solicitation and advertising so as to sell securities in a private placement under Section 506 of the Securities Act of 1933. Companies wishing to market securities are now able to market that truth. Unfortunately, this does little to further true crowdfunding because only”accredited investors” (those with a net worth of at least one million dollars excluding property, or a $200,000 annual income) could take part. The issuer must take”reasonable steps” to confirm that all buyers are accredited investors.
Accredited investors have always had access to equity investment chances. In terms of complete access to crowdfunding investment opportunities by the ordinary man that was envisioned when the Jobs Act was passed, the SEC issued the first set of draft principles — here is a PDF of this proposal — in October. Following are the proposed regulations.
Regulations for Businesses That Want to Increase Equity via Crowdfunding
For businesses seeking to raise funds through equity crowdfunding the rules say the following.
- $1 million maximum. A corporation can increase a maximum aggregate amount of $1 million through crowdfunding offerings in any 12-month period.
- Use established portals. All transactions must be completed utilizing a documented crowdfunding portal or broker-dealer. Companies can’t set up their own site for the offering or use a web site that’s not registered with the SEC. (Kickstarter, which eases crowdfunding on a reward basis, has said it won’t enter the equity arena. Indiegogo hasn’t stated its intent about registering for equity crowdfunding.)
- Less than $100,000. The financial statements of companies raising less than $100,000 shouldn’t be reviewed or audited by a certified public accountant.
- $100,000 to $500,000. Those seeking to raise between $100,000 and $500,000 are required to have their financial statements reviewed by a CPA.
- More than $500,000. Businesses raising more than $500,000 are required to have their financial statements officially audited by a CPA.
Businesses raising money via crowdfunding are required by law to disclose the following information.
- Names of officers, directors and large shareholders (those holding over 20 percent of the ownership).
- Contact information for the organization and officers and supervisors so people can find and confirm its presence.
- A detailed business plan and an explanation of how the funds raised would be used.
- A description of the financial state of the company including tax returns and financial statements.
- The price to the public of the securities being offered, the goal offering amount, the deadline to get to the goal offering amount, and if the organization will accept trades in excess of the target offering amount.
Firms using crowdfunding to offer and sell securities will have to submit an annual report with the SEC and supply it to investors also.
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Regulations for Investors
Within a 12-month period investors are allowed to spend as follows.
- $2,000 or five percent of the yearly income or net worth, whichever is higher if both their yearly income and net worth are less than $100,000.
- Ten percent of the yearly income or net worth, whichever is higher, if their yearly income or net worth is at least $100,000.
- $100,000 maximum. Throughout the 12-month period, these investors would be unable to buy more than $100,000 of securities through crowdfunding.
- No immediate resale. Securities bought in a crowdfunding transaction can’t be resold for a period of one year.
Regulations for Intermediaries
Intermediaries must do the following.
- Register with the SEC and the Financial Industry Regulatory Authority (FINRA) as either a portal or a broker-dealer. The financing portal is a new SEC registration class.
- Make sure that investors complete investor education requirements established by the SEC and understand the risks of investing in crowdfunded securities.
- Protect the privacy of investors.
- Take action to prevent fraud.
- Guarantee that investors don’t violate their personal investment limits. That is a particularly tough requirement of the law to apply and the SEC might not impose it.
- Not pay finders or affiliates for bringing in investors.
- Prohibit their own directors and officers from investing in companies issuing securities on their platforms.
Intermediaries can’t provide investment advice or make recommendations about funding individual crowdfunding attempts, nor will they solicit purchases of securities provided on their sites. Intermediaries are also banned from managing investor funds.
A comment period on the proposed regulations runs to the end of January 2014 and modifications to those regulations may occur. Then equity crowdfunding may eventually become a reality in spring 2014.
Firms wishing to pursue crowdfunding should think about that if they would like to increase less than $100,000, crowdfunding may not be the best alternative because the commissions and fees would comprise a high proportion of funds raised and funding would have a whole lot of money and time.
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