Banking & Finance, Small Business & Startups, and Technology

SEC adopts new rules for crowdfunding

They should help smaller firms with capital and provide investor protection.

November 6, 2015
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By the end of January, startups and small businesses will have an additional means for raising capital.

On Oct. 30, the Securities and Exchange Commission adopted final rules to permit companies to offer and sell securities through crowdfunding. The SEC also voted to propose amendments to existing Securities Act rules to facilitate intrastate and regional securities offerings.

The final rules — Regulation Crowdfunding — permit non-accredited individuals to invest in securities-based crowdfunding transactions, subject to certain investment limits.

“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” said Mary Jo White, SEC chair.

The new rules and proposed amendments are designed to assist smaller companies with capital formation and provide investors with additional protections.

The rules limit the amount of money an issuer can raise using the crowdfunding exemption, impose disclosure requirements on issuers for certain information about their business and securities offerings, and create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.

The new rules permit a company to raise a maximum aggregate amount of $1 million through crowdfunding in a 12-month period.

Individual investors with an annual income or net worth of $100,000 or less can now contribute the greater of $2,000 or 5 percent of the lesser of their net worth or annual income. Those with an annual income or net worth of equal to or greater than $100,000 can contribute 10 percent of the lesser of their 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.

The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Securities and Exchange Commission will be effective Jan. 29, 2016.

“Platforms like Kickstarter and Indiegogo will be able to register with the SEC if they are interested in taking part in these new crowdfunding rules under the SEC guidance,” said Nathaniel Wolf, an attorney with Mika Meyers.

Wolf said he expects to see businesses utilize the new crowdfunding option for raising capital but said it will likely take time before it is widely used.

“It will be interesting to see who does it and what opportunities people have in the crowdfunding world,” he said.

Wolf said one of the encouraging things about the SEC rules is the opportunity for waiving the financial audit requirement for some businesses.

“Under the proposed rules, the SEC was going to require that anyone who wanted to seek investments on one of these crowdfunding sites would have to disclose audited financial statements. That is a huge start-up cost for companies who are there to get funds, so spending thousands of dollars to get audited financial statements would probably be cost prohibitive for most companies,” Wolf explained.

“The SEC waived the auditing requirements for some smaller investment goals and also waived the audit requirement for a number of first-time crowdfunding opportunities. So companies will be able to get into that for the first time without doing audited financial statements. Some may have to do some type of review by a public accounting firm, but they would not have to be audited, so they wouldn’t have that higher level of scrutiny.”

Wolf said the goal of the SEC is to mitigate risk for individual investors, and he expects the final provisions will help meet that goal.

“I think the investment caps, as well as heightened disclosure requirements, will hopefully head off fraud,” he said.

He added, “The SEC is putting a lot of requirements on companies who use the platform to raise capital as far as what disclosures they have to make, and they are also putting some onus on crowdfunding platforms to take some responsibility in making sure the opportunities they put out are legitimate and reduce the risk of fraud.

“So there is liability and risk out there for the companies seeking investments on the crowdfunding platforms as well as the portals and platforms that offer the services. They aren’t just a bulletin board; they have to scrutinize.”

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