On October 30, 2015, the Securities and Exchange Commission (the “SEC”) voted to adopt Regulation Crowdfunding (“Regulation CF”) under the provisions of Title III of the JOBS Act of 2012 (the “JOBS Act”).  The final rules adopted under Regulation CF became effective on May 16, 2016, with entities wishing to act as broker-dealers or “crowdfunding portals” for such offerings starting the application process with the Financial Industry Regulatory Authority, Inc. (“FINRA”) as early as the end of January.

Crowdfunding Requirements for Investors

Via the creation of Regulation CF, the JOBS Act added a new exemption to the Securities Act of 1933, Section 4(a)(6), to permit securities crowdfunding without registration. The exemption is subject to statutory conditions, however: The aggregate amount that may be sold to “all investors” may not exceed $1 million in any 12-month period.  The caveat of “all investors” allows Regulation CF offerings to be available to both accredited and non-accredited investors.  That said, there are restrictions that have been imposed on how much money may be invested by each investor in such an offering.

An investor is limited in the amount that may be invested in crowdfunding securities in any 12-month period:

  • If either the annual income or the net worth of the investor is less than $100,000, the investor is limited to the greater of $2,000 or 5% of the lesser of his or her annual income or net worth.
  • If the annual income and net worth of the investor are both greater than $100,000, the investor is limited to 10% of the lesser of his or her annual income or net worth, to a maximum of $100,000.

The “lesser” standard may limit the funds available from non-accredited investors. However, the SEC has indicated that it would permit concurrent offerings under Section 4(a)(6) and Rule 506(b) or (c), which could effectively result in multiple offerings to be conducted concurrently without the impact of integration being a factor.

Additionally, any transaction conducted under Regulation CF must be made through a broker-dealer or a “funding portal” that meets the requirements set forth herein below.  Issuers are prohibited from offering crowdfunding investments directly.

Crowdfunding Requirements for Issuers

An issuer wishing to conduct an offering under Regulation CF must be incorporated or organized under the laws of a state or territory of the United States, or the District of Columbia. It may not be an “investment company” as defined under the Investment Company Act of 1940, and cannot be an SEC-reporting company. “Blank check” companies are disqualified from relying on the exemption from registration, as are issuers disqualified by reason of “bad actor” disqualification.

In addition to the above, the SEC also requires that issuers provide certain information to investors through the filing of Form C on EDGAR.  Some information included in Form C is mandatory, but the issuer may include other information in Form C filings, as well. The mandatory information for each issuer includes, but is not limited to, the following:

  • The name, legal status, physical address, and website address;
  • The names of the directors and officers, the positions and offices held by those persons, how long they have served in those positions, and the business experience of those persons over the past three (3) years;
  • A description of the business of the issuer and anticipated plan of business;
  • A discussion of the material risk factors of making an investment in the offering;
  • The target offering amount and the deadline to reach such target amount;
  • The price of the securities or the method for determining the price; and,
  • A description of the purpose and intended use of the offering proceeds.

Issuers of securities under Regulation CF will also be required to provide financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”).  Such financial statements must cover the two (2) most recently completed fiscal years or since inception if the issuer has not been in existence for two (2) years.  Depending on the amount of money being raised—which shall also include any amounts raised by the issuer in the prior 12 months in reliance on Regulation CF—issuers must subject these financial statements to a specified review, including:

  • If current offer plus previous raises amounts to $100,000 or less, the financial statements must be certified by the principal executive officer and accompanied by information from the company’s tax returns;
  • If current offer plus previous raises amounts to $100,000.01-500,000, the financial statements will be required to be reviewed by an independent public accountant and include the accountant’s review report. If audited statements are available, those must be provided.
  • If current offer plus previous raises amounts to $500,000.01 or more, the financial statements must be audited by a CPA. However, if the issuer has not previously sold securities under Regulation CF, the financial statements will only be required to be reviewed by a CPA.

Further, issuers that have sold securities in reliance on Regulation CF must file information with the SEC and post it on their websites on an annual basis. The annual filing must be made within 120 days of the issuer’s fiscal year-end.

[Continued in Regulation Crowdfunding – Part II]