On October 30, 2015, the US Securities and Exchange Commission approved rules to allow companies to use crowdfunding to offer and sell securities. This is what is called regulation crowdfunding, and it has certain rules in place that allow investors and companies to benefit under the law.
What is Regulation Crowdfunding Exactly?
No doubt you have heard of crowdfunding. If you’ve ever been on social media and seen someone with a Kickstarter or GoFundMe campaign, you know that it is a way for companies and small businesses to earn funding for various projects. Unlike Kickstarter, you are not offering a gift in return for the investment. Rather, you are selling securities or equity in your startup business. Selling securities in businesses is highly regulated through the US Securities and Exchange Commission.
When is the Ability to Crowdfund Equity Available and What are the Limits?
You will be able to crowd fund equity 180 days after the rules were approved, which means that in May you can start using crowdfunding to offer and sell securities. The original regulations stated that you could sell securities without a full initial public offering or IPO if you limited your investors or used investors that were credited with a net worth of more than $1 million or those who made more than $200,000 a year. In the old scenario, you could not contact potential investors using the Internet, radio, newspapers, email, television, or any other public means of solicitation.
This has changed now. Anyone can invest a minimum of $2,000 or 5 percent of his or her net worth or annual income (whichever one is less), if he or she is making less than $100,000 (or if his or her net worth is less than $100,000). If your investor has a net worth and annual income that exceeds $100,000 when combined, he or she may invest up to 10 percent of either his or her net worth or annual income, whichever is less. An investor may not invest more than an aggregate $100,000 in all crowdfund offerings. These investment rules are effective during a 12 month period.
You must be able to meet your funding goal, and you cannot earn more than one million dollars per crowdfunding offering.
Some companies will not be eligible for regulation crowdfunding. These companies include Exchange Act reporting companies, foreign companies, certain types of investment companies, companies with no business plan, companies that have a business plan that indicates the intent is to be acquired or merged with unidentified companies, and companies that have failed to follow the annual reporting requirements within the regulations.
These are just some of the many rules from the SEC. Make sure to discuss all of the requirements and restrictions placed on you and your small or medium sized business with your attorney.
What are the Benefits of Crowdfunding?
The basic benefits of crowdfunding include being able to procure money from unaccredited investors. What’s more, if you have both unaccredited and accredited investors and you need to raise more than $1 million, you can do a parallel offering by doing a Title II offering (which does not have the $1 million cap) and a regulation crowdfunding offering. One thing to be aware of is that you can’t link the offerings together in marketing materials. They need to be considered independent offerings or they will be considered integrated.
What do I Need to be Aware of, both Personally and within the Business?
Some things to keep in mind when considering regulation crowdfunding include that you must remain compliant at all times. This means filing your annual report on time and linking to it on your website. While you are crowdfunding, you need to adhere to all the rules and regulations or you can get to some serious trouble. You must have a business plan and not use the crowdfunding to invest in further crowdfunding. You will need to be sure that you have enough money to hit your funding target and then some, because investors can rescind their offers up to 48 hours before the crowdfunding closes.
Your business will also be under intense scrutiny. You must disclose everything to your investors and be as transparent as possible. This is a key provision in regulation crowdfunding. You’ll also have to produce financials regularly to your investors. If you are looking to raise less than $100,000, your personal financials will have to be disclosed as well. That will include your taxable income, how much money you made, and your total tax you paid.