By Kresimir Peharda, Partner.

March 1, 2016

The day before Halloween the SEC gave entrepreneurs a treat by passing final rules to enact Regulation Crowdfunding. The SEC rules will allow the offer and sale of up to $1 Million of securities through crowdfunding over a 12 month period.

Who is eligible?

Any company except for the foregoing is eligible to use the rule:

  • non-U.S. companies,
  • Exchange Act reporting companies,
  • certain investment companies,
  • companies that are subject to disqualification under Regulation Crowdfunding,
  • companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, 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.

What are the investor financial requirements in a crowdfunding offering?

If either the investor’s annual income or net worth is less than $100,000, than the greater of:

  • $2,000 or
  • 5 percent of the lesser of their annual income or net worth.

If both the investor’s annual income and net worth are equal to or more than $100,000, then 10 percent of the lesser of their annual income or net worth. During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

What information do companies have to provide to the SEC and to investors?

Companies have to provide certain information to the SEC before an offering and file an annual report with the SEC and provide copies to investors. Companies also have to provide to the party facilitating the offering and to investors certain information, including the following:

  • 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 that, 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 public accountant, or audited by an independent auditor. A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited 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.

How can companies sell their securities under Regulation Crowdfunding?

All offers and sales relying on the new rules would be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.

What are the restrictions on re-sales?

Securities purchased in a crowdfunding transaction generally cannot not be resold for one year.