The U.S. Securities and Exchange Commission (the “SEC”) adopted final rules that permit eligible companies to offer and sell securities through crowdfunding. Crowdfunding is a process by which a large number of investors who may not otherwise be accredited investors can make limited investments over an internet platform known as a “funding portal.” These Regulation Crowdfunding Rules (the “Rules”) provide a new alternative for small businesses to raise capital. The most recent Rules, allowing companies to raise up to $1 million in seed capital through online crowdfunding, became effective on May 16, 2016. We represented an issuer with one of the first Regulation Crowdfunding offerings which included preparing an offering circular, registering with the SEC and the online funding portal, negotiating escrow and transfer agent arrangements, assuring legal compliance, coordinating accounting and marketing efforts and launching an online crowdfunding offering of stock to the public available to both accredited and non-accredited investors. It is our hope that Regulation Crowdfunding increases access to capital to small businesses.
Size of Offering and Investment Limitations
A company offering under the Rules may only raise a maximum aggregate amount of $1 million through crowdfunding in any 12-month period. The Rules also place limitations on the amount that each individual investor may invest in the aggregate across all crowdfunding offerings in a 12-month period. This amount is based on the investor’s annual income or net worth and ranges from $2,000 to 10% of their annual income or net worth.
The Rules require that all crowdfunding transactions take place through a funding portal that is registered with the SEC. Funding portals are required to satisfy many requirements including providing disclosures and educational materials, taking measures to reduce the risk of fraud, and complying with certain procedures regarding transmission of funds. As a result, the funding portal plays a large role in the process including facilitating the transmission of information to the SEC.
A company conducting a crowdfunding offering is required to publicly file an offering statement (a “Form C”) with the SEC on the EDGAR platform. The Rules provide detailed information about what information is required to be included in the Form C. This process is often facilitated by the funding portal, which may provide an online questionnaire for companies. The funding portal will also be responsible for all communications with potential investors, who must be directed to the funding portal to receive anything more than basic information regarding the offering. An offering statement or “circular” will be posted on the funding portal and contains a description of the company’s business, the securities being sold and the risks of making an investment. The issuer will also be expected to produce marketing content describing the company and the opportunity including a promotional video. After the offering, the company will have an ongoing obligation to update its Form C annually unless certain stockholder and asset conditions are met.
Certain Other Restrictions
Certain companies are not eligible to use crowdfunding, including foreign companies, companies that are already reporting companies under the Securities Exchange Act of 1934, certain investment companies and private funds, companies that are disqualified under the Rules (substantially similar to the “bad actor” rules under Regulation D), companies that have failed to comply with the annual reporting requirements under the Rules, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.
The Rules also put restrictions on an investor’s right to resell the securities within a one-year period and put restrictions on the advertising that a company may do in connection with the offering.
In addition to Regulation Crowdfunding, the SEC has also released final Regulation A+ rules that allow companies to raise up to $50 million through crowdfunding. Crowdfunding offerings under Regulation A+ require SEC approval, audited financials, and a robust “Form A” public offering statement, among other requirements. This provides companies wishing to raise more than $1 million the ability to still use a crowdfunding platform to raise capital from non-accredited investors.
 See Regulation A section below for more information about crowdfunding for amounts over $1 million.