Last month, the crowdfunding regulations for the JOBS Act (finally) went into effect, ending the years-long wait for companies to be able to sell stock or debt to investors via internet funding portals. The demand for this kind of system has been demonstrated in the success of businesses like Kickstarter and IndieGoGo, where the general public can support companies and causes by buying in early, often in exchange goofy prizes or exclusive access to a product, and gaining the satisfaction of helping fund the company’s beginnings. Now, they can support ideas and companies they believe in by purchasing equity.
SECURITY REGULATIONS 101
To comply with federal regulations, private companies selling securities (i.e., stock, membership interests, units, debt or other equity) must either register their securities with the Securities Exchange Commission (SEC) or find an exemption from registration. The JOBS Act provides an exemption from registration for certain crowdfunding transactions.
THE DETAILS FOR THE CROWDFUNDING EXEMPTION
- The total equity of the Company—in this case, called the “issuer”- sold to all investors cannot exceed $1 million in a 12-month period.
- The total amount of equity sold to a single investor in that period cannot exceed:
- $2,000 or 5% of the investor’s annual income or net worth (whichever is greater) if the investor’s income is less than $100,000.
- 10% of the lesser of investor’s annual income or net worth, with a maximum of $100,000, if the investor’s annual income and net worth exceeds $100,000.
- The offer must be conducted through a single broker or funding portal (called “an Intermediary”) that is registered with the SEC and the Financial Industry Regulatory Authority (FINRA).
- The issuer must comply with the Securities Act of 1933 relating to disclosure and other requirements.
ALL ABOUT INTERMEDIARIES
- It is the intermediary’s responsibility to ensure that prospective investors review educational materials about the Company selling securities so the prospective investor understands the risks associated with their investment.
- Intermediaries must also take additional steps to reduce the risk of fraud, like conducting background and securities enforcement checks on the officers, directors, and persons holding more than 20 percent of the outstanding equity of the issuer.
- No officer, director or partner of the intermediary may invest in the offering.
- Many intermediaries have already launched, including those on this list released by the Financial Industry Regulatory Authority,
MORE ISSUER DISCLOSURES
- The issuer will be required to file and disclose to the SEC information related to the offering, including:
- information about officers, directors, and owners of 20 percent or more of the issuer;
- a description of the issuer’s business and the use of 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 target offering amount;
- whether the issuer will accept investments in excess of the target offering amount;
- certain related-party transactions; and
- a discussion of the issuer’s financial condition and financial statements.
- The issuer’s financial disclosure requirements are based on the amount of securities sold in reliance of the crowdfunding regulation within the prior 12-month period.
- If the issuer is issuing up to $100,000, it must provide financial statements and certain information from the issuer’s federal income tax returns, both certified by the CEO/CFO to be true and correct;
- If the issuer is issuing between $100,000 and $500,000, it must provide financial statements reviewed by an independent public accountant, or if available, financial statements audited by an independent public accountant ;
- If the issuer is issuing more than $500,000, it must provide financial statements audited by an independent public accountant.