Regulation Crowdfunding: Effective May 16

In September 2012, I was a panelist in a presentation held at the Stamford Innovation Center in 2012 on Crowdfunding, which was to have been enacted by January 1, 2013.  There were many questions about the new law, enacted to enable startups and small businesses to solicit capital from the public.  Now, more than three years later, we are within two months of the comprehensive regulatory regime SEC rules on “Regulation Crowdfunding” becoming effective. Many deterrents to crowdfunding that were included in the original Title II of the Federal JOBS Act (2012) are in the SEC Rules:

• the $1 million aggregate offering limit within a 12 month period; (Comment: however, issuers can also proceed with a Rule 506(b) offering);

• the individual investment limits (Comment: based on income);

• the need in some cases for audited financial statements and the cost of filing the new Form C with the SEC, which requires companies to disclose comprehensive information and their business, and the securities being offered;

• the advertising restrictions on crowdfunding transactions;

• the illiquidity of the investments (Comment: restrictions on resale);

• Crowdfunding transactions must be conducted exclusively online through platforms known as “funding portals,” or by a broker-dealer.  Issuers can use only one platform at a time;

• An issuer may, at the same time as it is making a crowdfunding offering, conduct a contemporaneous exempt offering under Regulation D’s Rule 506 (b) (restrictions on advertising and solicitations). Comment: issuers are not precluded from relying on Rule 506(b) when making a crowdfunding offering;

• Crowdfunding offerings are not subject to state registration or “blue sky” requirements; and

• Financial Statement Requirements:

  Offerings of $100,000 or less: certified financial statements by the issuer’s principal executive officer to be true and complete in all material respects and be accompanied by certain information from the issuer’s federal income tax return for the most recently completed year and certified by the issuer’s principal executive officer as reflecting accurately the amounts reported on the tax return (no copy of tax return needs to be filed).

  Offerings of more than $100,000 but less than $500,000:  financial statements reviewed by an independent public accountant and include a signed review report. If audited financial statements are otherwise available, those must be provided, along with a signed audit report, instead of reviewed financial statements

  Offerings of more than $500,000 but less than $1 million:  financial statements must be audited by an independent public accountant and include a signed audit report.  However, first-time crowdfunding issuers are permitted to provide reviewed rather than audited financial statements (along with a signed review report), unless audited financial statements are otherwise available.

  I will post further regarding Regulation Crowdfunding, including the disclosure requirements of new SEC Form C.

• Meanwhile, the entire 650 page plus SEC Release is here:

  https://www.sec.gov/rules/final/2015/33-9974.pdf