To jumpstart the economic recovery, following the Great Recession, with the idea toward further easing access to capital , the United States Congress, passed the Jumpstart Our Business Startups (JOBS) Act of 2012 (the “Act”). The Act, which amended the Securities Act of 1933 added, among other things, a new Section 4(a)(6), which provided for an additional exemption from private offering registration, through internet crowdfunding.
Crowdfunding allows businesses to raise capital from a large number of investors, each contributing relatively small amounts via the internet and/or social media. This method is often favored by startups and smaller businesses that may not have easy access to traditional methods of fundraising.
The new statutory exemption required:
- Offering sizes to be no more than $1,000,000.00 in any twelve-month period;
- Investing caps based on an individual’s net worth or income;
- Issuers to file with the SEC;
- The offering to be conducted through a registered online funding portal.
On October 30, 2015, the SEC adopted final rules flushing out the crowdfunding exemption. The new regulations govern the issuers making the offering, clarifies resale restrictions, exempts securities sold under the crowdfunding exemption from counting toward the 12(g) Exchange Act registration threshold and provides a framework of operation regarding crowdfunding portals and brokers, which include a new registration form, called “Form Funding Portal.”
The SEC also drafted a new Form C that issuers of crowdfunded securities must file with the SEC before the commencement of this type of offering; during the offering to report progress and material changes; annually after the completion of the offering and at the conclusion of the offering.
Limits on Capital
- Per Issuer: Issuers may not raise more than $1 million of capital in any rolling 12-month period.
- Per Investor: For individuals with either an annual income or net worth less than $100,000, issuers may only raise the greater of (a) $2,000 or (b) 5% of the lesser of the investor’s annual income or net worth. For individuals with both an annual income and net worth of at least $100,000, 10% of the lesser of the investor’s annual income and net worth (not to exceed $100,000 per individual).
- Form C: Identifying, structural and financial information about the issuer and equity holders, as well as its business plan, use of proceeds and offering details.
- Financial Statements: Offerings of $100,000 or less – GAAP financial statements certified by the Issuers principal executive officer. Offerings of between $100,000 and $500,000 – GAAP financial statements reviewed by an independent public accountant or audited financials. Offerings of over $500,000 – for the first exempt offering, the same disclosure rules apply as for a $100,000 - $500,000 offering; for subsequent offerings, issuers must supply independently audited financial statements with an accompanying audit report.
Advertising and Solicitation
- Restrictions: Notices must direct potential investors to the issuer’s investing portal. Additional information can only be accessed through such portal.
- Not Restricted: Issuer’s may communicate with investors and potential investors through the crowdfunding platform, but must identify itself.