Optima Law Group Blog

Equity Crowdfunding

What do you need to know about the SEC’s recently enacted Equity Crowdfunding rules?

 

Crowdfunding is an exciting innovation of our internet age. By using the internet as a medium to reach the masses, a company can launch an idea and ask many people to contribute money to fund their idea. The theory is that many hands make light work. Websites like Kickstarter.com and Indiegogo.com are excellent examples of the fundraising type of crowdfunding where the purchaser is essentially giving money to the company. This blog, however, is focused solely on what is termed “Equity Crowdfunding.” Equity Crowdfunding is when a company (“issuer”) asks many people (“purchasers” or “investors”) to contribute an amount of money toward their goal, and in return, the purchasers receive equity in the company. Under direction of the JOBS Act, Title III, the SEC has recently finalized a regulatory structure for this type of funding effective May 16, 2016. The final rules are over 600 pages, however, we have listed some of the highlights below. Note that this is only a small portion of the rules and we recommend contacting an attorney to safely navigate the SEC’s Equity Crowdfunding rules.

 

Who is eligible to Equity Crowdfund?

 

In issuing its final rules, the SEC outlined who is NOT eligible to use the Equity Crowdfunding rules:

·         Companies organized outside the U.S.;

·         Companies required to report to the SEC;

·         Investment companies;

·         Disqualified companies;

·         Companies that have failed to comply with the annual reporting requirement during the two years preceding the filing of a Equity Crowdfunding offering; and

·         Companies with no specific business plan or whose business plan is to engage in a merger or acquisition with an unidentified company.

 

How much can a company raise?

 

The SEC stated that an eligible company can raise up to $1 million of securities through Equity Crowdfunding. When a company is also issuing securities using other registration exemptions, the company must comply with the separate requirements of the exemption and the separate limits will apply. Companies will need to be especially careful during simultaneous offerings under Equity Crowdfunding rules and another Securities Act registration requirement. For example, issuing securities under a “quiet” Rule 506(c) offering prohibits solicitations and a company taking advantage of 506(c) and Equity Crowdfunding would have to ensure 506(c) purchasers were not solicited by the Equity Crowdfunding offer.

 

How much can an investor give?

 

An individual investor can only purchase, from ALL Equity Crowdfunding issuers, during a 12-month period:

·         The greater of $2,000 or 5 percent of the lesser of the investor’s annual income or net worth if       either annual income or net worth is less than $100,000; or

·         10 percent of the lesser of the investor’s annual income or net worth, not to exceed $100,000, if both annual income and net worth are equal to or exceed $100,000.

 

Are there any required disclosures?

 

The SEC requires that prior to launching an Equity Crowdfunding offering, the company must file with the SEC and provide to investor (and the intermediary) an offering statement. The offering statement has a whole host of required information with varying requirements based on the target offering amount.

 

What are the mechanics of Equity Crowdfunding?

 

Equity Crowdfunding must be conducted:

·         though a single intermediary that is an SEC-registered broker-dealer or an SEC-registered funding portal that is also a FINRA member; and

·         exclusively through the intermediary’s platform.

Investors are entitled to cancel their investment commitments at any time and for any reason until 48 hours prior to the offering deadline. Any material change in offering terms will require a reaffirmation of the investor’s commitment.

 

While Equity Crowdfunding has its advantages, it also has drawbacks and is not a fit for every company. As always, don’t hesitate to reach out to us if you have any questions about Equity Crowdfunding, other options for capital raising, or anything else relating to the success of your business. We would love to hear from you at 858-964-4697 or info@optimalawgroup.com.