What Startups Need To Know About Regulation Crowdfunding

Regulation Crowdfunding under the Jobs Act officially launches May 16, 2016.

Crowdfunding portals and broker/dealers have been allowed to register under Regulation Crowdfunding since January 29, 2016. However, May’s launch now includes all US issuer companies that meet the Security and Exchange Commission’s (SEC) federal securities exemptions under the Jobs Act of 2012. This is a momentous occasion, as the full enforcement of the Jobs Act officially opens doors to so many startups looking to invite US and international investors to equity crowdfunding vehicles. This May launch also officially recognizes crowdfunding as a concretized investment vehicle, and not some fly-by-night, full-risk attempt by entrepreneurs to lure investors into a possibly non-performing venture.

Regulation Crowdfunding under US SEC laws stands as a regulatory pioneer in the international crowdfunding arena going forward. Although these regulations are currently applicable to US companies, international partner and joint venture companies can be beneficially and adversely affected. Thus, it is important to understand the details and requirements of these regulations, to reap benefits and avoid pitfalls of crowdfunding. In January we learned first-hand about May’s crowdfunding launch via Business Forward’s conference call with the SEC’s Chief of Small Business, Sebastian Gomez Abero. As expected, Regulation Crowdfunding is an amendment to US Federal Securities law, granting issuers certain exemptions under the Jobs Act of 2012. All entrepreneurs considering equity crowdfunding need to especially know these points:

Raising Capital Under Regulation Crowdfunding:

1. A US company (issuer) can raise a maximum amount of US$1 million through crowdfunding offerings in a 12-month period;

2. Both US and international individual investors, over a 12-month period, can invest in the crowdfunding offerings, once the investors meet these requirements:

• If either their annual income or net worth is less than US$100,000, than the greater of:
  • US$2,000 or
  • 5% of the lesser of their annual income or net worth.
• If both their annual income and net worth are equal to or more than US$100,000, then 10% of the lesser of their annual income or net worth; and

3. During the 12-month period, the total amount of securities sold to an investor through all crowdfunding offerings may not exceed US$100,000.

Financial Reporting Under Regulation Crowdfunding:

1. For the initial 12 months an issuance of US$500,000 but not more than US$1,000,000 of securities would be permitted to provide reviewed rather than audited financial statements, unless audited financial statements of the company are already available.

2. After the initial 12 month period:

• Issuances less than US$500,000 can continue to provide financials under independent review.
• Issuances of more than US$500,000 must provide audited financial statements.

3. Companies that rely on the recommended rules to conduct a crowdfunding offering must file the following information with the SEC and all investors:

• The price to the public of the securities, the target issuance amount, the deadline to reach the target offering, the use of proceeds from the issuance;
• A discussion of the company’s financial condition and financial statements of the company;
• Information about officers and directors as well as owners of 20% or more of the company;
• An annual report with the Securities and Exchange Commission.

4. Funding portals such as Kickstarter and Indiegogo as well as broker/dealers would be required to register with the SEC on new Form Funding Portal, and become a member of a national securities association (FINRA). This registration has been opened since January 29, 2016.

Investor Quota and Solicitation Under Regulation Crowdfunding:

1. A company may lose exemption under Regulation Crowdfunding if the company has more than 500 non-accredited investors and more than US$10 million in assets.

• Financial reporting requirements would also revert to needing full audited financial statements as well.
• For both non-accredited and accredited investors, securities purchased in crowdfunding generally could not be resold for 1 year.

2. A company can accept an investment commitment from an investor only after that investor has opened a verified account with all legal and financial documents checked, and due diligence completed.

3. Almost all exemptions under US Federal Securities law have defined limits to investment advice. Regulation Crowdfunding prohibits funding portals and issuers from offering investment advice! Remember, due diligence documents and education materials must be presented, but not in the form of advice or advertising persuasion. SEC fines can ensue!

4. One of the strictest stipulations under Regulation Crowdfunding is investor solicitation. It takes a crowd to invest, but to remain in exempt status under US Federal Securities law investor solicitation must be closely guarded. All open marketing efforts of the company must occur exclusively through one FINRA registered funding portal or broker. The startup cannot actively advertise the offering separate from the chosen funding portal at all! All other social media and written documents must come from an informational, not persuasive perspective.

Any US startup, or any international startup partnering, joint-venturing, or opening a subsidiary in the United States of America need to fully and totally understand the above regulations if equity crowdfunding is in the financial or strategic plan. A good further reading that helps explain these May 2016 launch implications comes from Crowdfund Insider’s Samuel Guzik, JOBS Act Crowdfunding Begins On May 16, 2016: Don’t Get Busted For Solicitation! I hope I’ve alerted you, not because I want you, dear startup, to stop crowdfunding, but because we want you to crowdfund in a smart and savvy manner. Get legal and compliance advice way before registering with the chosen funding portal. Even if the startup is not in the US, US Federal Securities law has an uncanny way of dictating international securities law. This May 2016 crowdfunding launch affects all startups, and all investors who are interested in crowd investing. Be in the know!

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