What is Regulation Crowdfunding?

Regulation Crowdfunding is a way to raise money for your company by offering securities—debt or equity—to the public without having to register the securities with the Securities and Exchange Commission. Under Regulation Crowdfunding, companies can raise up to $5 million in total in a 12-month period. All crowdfunding securities offerings must go through an intermediary registered with the SEC, either a broker-dealer or an online funding portal. The company must conduct its securities offering exclusively through the intermediary’s platform. A company cannot conduct an offering of securities using more than one intermediary.

Regulation Crowdfunding is only available to companies organized and operating in the United States and Canada. Investment companies and “blank check” companies, among others, are not able to use Regulation Crowdfunding. Regulation Crowdfunding is not available to a company if the company, or an affiliate of the company, is subject to a criminal conviction, an administrative order or an injunction or bar involving certain securities law violations, or if any of the company’s directors, officers, general partners, 10 percent owners or promoters, are subject to the same conviction, order, injunction or bar.

Individual State Securities Laws

In addition to United States federal securities laws, each state has its own securities laws referred to as “blue sky” laws. Unless federal securities law preempts the state blue sky laws, every securities offering must comply with both the federal and state laws, which if two or more states are involved can be an expensive and time-consuming job. Regulation Crowdfunding offerings are exempt from registration or qualification under state blue sky laws. Even though crowdfunding offerings are exempt from registration or qualification under state blue sky laws, states still have the authority to bring enforcement actions for fraud.

Regulation Crowdfunding also prohibits states from requiring filing information about the offering or charging fees, except for the state that is the principal place of business of the company and any state where 50% or more of purchasers of the total amount of the securities reside. Massachusetts collects a variable fee of 1/20th of 1% of the amount offered in Massachusetts, with a minimum of $300 and a maximum of $1,500.

Required Disclosures

Regulation Crowdfunding requires disclosure of information about the company and the securities offering in an offering statement filed by the company with the SEC and provided to investors and the intermediary hosting the offering. The offering statement must include information about the officers, directors and owners of more than 20% of the company’s equity, a description of the company’s business and the use of the proceeds from the offering, the price to the public of the securities or the method for determining the price, the target offering amount and the deadline to reach the targeted amount, whether the company will accept investments over the targeted amount, certain related party transactions and a discussion of the company’s financial condition and financial statements.

Financial statements must cover the two most recently completed fiscal years of the company or, if shorter, the period since the company was first formed. If the amount of the securities offered is $124,000 or less, the company must provide the amount of total income, taxable income, and total tax, as reported on the company’s federal income tax filed with the IRS for the most recently completed year, certified by the principal executive officer of the company. The company must also provide financial statements of the company, certified by the principal executive officer of the company to be true and complete in all material respects. If the offering is for more than $124,000, but not more than $618,000, the company must provide financial statements of the issuer reviewed by an independent public accountant. If the amount of securities offered is more than $618,000, the company must provide financial statements of the company audited by an independent public accountant. If the company, however, has not previously offered securities under Regulation Crowdfunding, and the securities being offered are more than $618,000 but not more than $1,235,000, the company only must provide financial statements that have been reviewed by an independent public accountant. In each of the instances described above, if the company already has financial statements that have been audited by an independent public accountant, the company must instead provide those audited financial statement.

Filing Annual Reports

A company that has sold securities in a Regulation Crowdfunding offering is required to file an annual report with the SEC no later than 120 days after the end of its fiscal year. The report must be filed using the SEC’s EDGAR system and posted on the company’s website. Companies must continue to file annual reports with the SEC until the company is required to file reports under Securities Exchange Act Sections 13(a) or 15(d), the company has filed at least one annual report and has fewer than 300 holders of record, the company has filed at least three annual reports and has total assets that do not exceed $10 million, the company or another party purchases or repurchases all of the securities issued under Regulation Crowdfunding, or the company liquidates or dissolves under state law.

Limits on Non-Accredited Investors

Investors that are not “accredited investors” are limited in the amount of securities they may buy in a Regulation Crowdfunding offering. A non-accredited investor whose annual income or net worth is less than $124,000 may purchase no more than the greater of $2,500 or 5% of the lesser of the investor’s annual income or net worth. If the non-accredited investor’s annual income and net worth are both equal to or greater than $124,000, the investor’s purchasing limit is 10% of the lesser of the investor’s annual income and net worth, in any case not to exceed $124,000. For most purposes, an accredited investor is an individual with a net worth or joint net worth with a spouse of at least $1 million, not including the value of a primary residence, or an individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse exceeding $300,000 for those two years, and a reasonable expectation of the same income level in the current year.

Rights of Investors to Back Out

Even after an investor has committed to invest in the company’s securities, the company must allow the investor to back out at any time until 48 hours before the offering deadline. Also, if there is a material change to the information previously provided by the company to the investors, then all previous commitments will be automatically cancelled unless investors affirmatively reconfirm their commitments.

Restrictions on Resale

Securities purchased in a Regulation Crowdfunding transaction generally cannot be resold for a period of one year, unless the securities are transferred to the company issuing the securities, to an accredited investor, as part of an offering registered with the SEC, or to a member of the family of the purchaser, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchase, or following the death or divorce of the purchaser.

Advertising

A company may not advertise the terms of a Regulation Crowdfunding securities offering unless the advertisement directs potential investors to the intermediary’s platform and includes only the following information:

  • A statement that the company is conducting an offering under Section 4(a)(6) of the Securities Act.
  • The name of the intermediary and information (including a link in any written advertisement) directing potential investors to the intermediary’s platform.
  • The terms of the securities offering.
  • The name of the company, its address, phone number and website.
  • The email address of a representative of the company.
  • A brief description of the business of the company.

Testing the Waters

You are allowed to “test the waters” with potential investors in a Regulation Crowdfunding offering. This means you are allowed to determine the level of investor interest before you decide to bear the full cost of an offering. Before the offering statement for the securities is filed with the SEC, you cannot solicit payment, accept payment for the securities, or obtain a firm commitment to purchase securities.

Disclaimer: This blog post discusses general legal issues and developments. It is for informational purposes only and may not reflect the most current law and should not be taken as legal advice on any set of facts or circumstances. No reader should act or refrain from acting based on any information presented in this blog post without seeking the advice of counsel. Weiffenbach Law Offices PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this blog post.

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