A presentation on crowdfunding I gave at a networking conference.
This Crowdfunding Presentation Highlights of the Recommended Final Regulation Rules
The SEC prepared a release with highlights of the recommended final regulation crowdfunding rules.
What is Crowdfunding?
The Rules Would
Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
- If either their annual income or net worth is less than $100,000 then the greater of $2,000
- 5 percent of the lesser of their annual income or net-worth.
If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net-worth; and During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
Disclosure by Companies
- The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
- A discussion of the company’s financial condition;
- Financial statements of the company, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent auditor.
- A description of the business and the use of proceeds from the offering;
- Information about officers and directors as well as owners of 20 percent or more of the company; and
- certain related-party transactions.
A funding portal would be required to register with the Commission on the new Form Funding Portal and become a member of a national securities association (currently, FINRA). A company relying on the rules would be required to conduct its offering exclusively through one intermediary platform at a time.
The recommended rules would require intermediaries to, among other things:
Provide investors with educational material that explain, among other things, the process for investing on the platform, the types of securities being offered, and information a company must provide to investors, resale restrictions, and investment limits;
Take certain measures to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with Regulation Crowdfunding and that the company has established means to keep accurate records of securities holders;
Make information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
Provide communication channels to permit discussions about offerings on the platform;
Provide disclosure to investors about the compensation the intermediary receives;
Accept an investment commitment from an investor only after that investor has opened an account;
Have a reasonable basis for believing an investor complies with the investment limitations;
Provide investors notices once they have made investment commitments and confirmation at or before completion of a transaction;
Comply with maintenance and transmission of funds requirement; and comply with completion, cancellation, and confirmation of offerings requirements.
The rules also would prohibit intermediaries from engaging in certain activities, such as:
- Providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;
- Having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions and
- Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.
The rules would provide a safe harbor under which funding portals could engage in certain activities consistent with these restrictions. The rules also would require funding portals to maintain certain books and records related to their transaction and business.
Crowdfunding is an evolving method of raising money through the internet, but it has generally not been used to offer and sell securities. That is because
- Offering a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and
- an offer or sale of securities must be registered with the SEC unless an exemption is available.
The staff would undertake to study and submit a report to the Commission no later than three years following the effective date of Regulation Crowdfunding on the impact of the regulation on capital formation and investor protection.
If you would like to review the slide, we have conveniently provided it below.
As an update for 2021, The Bradshaw Law Group assists companies in raising money for businesses looking to utilize crowdfunding to raise capital. There are many laws associated and to do this right we offer a free consultation. Contact us today and get set in the right direction: https://bradshawlawgroup.com/location/contact/