Perspective: Kirton McConkie Law Blog

SEC moves to allow startup investing via crowdfunding

On Friday, October 30, 2015, the Securities and Exchange Commission (SEC) adopted final rules permitting crowdfunding. Crowdfunding is a capital fundraising strategy whereby issuers use the internet or social media to raise capital from a large number of investors in relatively small amounts. Pursuant to Section 4(a)(6) of the Securities Act of 1933, Regulation Crowdfunding permits capital raising by small startup businesses that may not have easy access to traditional methods of capital markets and venture capital fundraising. The final rules provide some flexibility to issuers seeking to crowdfund and intermediaries who are providing their services to such issuers.

The final rule allows issuers to raise up to $1 million in a 12-month period through online portals run by broker-dealers or funding portals registered with the SEC. Issuers must file certain information about their business and the securities offering with the SEC on the new Form C. Issuers must also provide such information to potential and actual investors and the offering’s crowdfunding intermediary.

The final rule permits individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to (i) if either their annual income or net worth is less than $100,000, than the greater of (a) $2,000 or (b) 5 percent of the lesser of their annual income or net worth; (ii) if both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and (iii) During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Under the final rule, financial reporting requirements are phased in, depending on the amount of the offering and the issuer’s previous use of crowdfunding. Issuers seeking to raise proceeds in excess of $500,000 are required to provide audited financial statements, prepared in accordance with US GAAP, for the issuer’s two most recently completed fiscal years. If the issuer, however, is proposing to raise more than $100,000 but less than $500,000, then the financial statements are only required to be reviewed and certified by an independent accountant. If the issuer is proposing to offer less than $100,000, then only the issuer’s chief financial officer must review and certify the financial statements. First-time crowdfunding issuers are not required to have their financial statements audited. Rather, such issuers are required only to have their financial statements reviewed. In order to help simplify the offering process for issuers, the final rule contains an optional Q&A option that issuers can use to provide the required disclosure under new Form C.

Final rules were also adopted pertaining to the registration and regulation of intermediaries. The final rule permits intermediaries to receive an equity position in the issuer as compensation for its services, however the interest received must be on the same terms as the offered securities and such compensation must be disclosed on the portal.

The new crowdfunding rule and related Form C will be effective 180 days after they are published in the Federal Register. The SEC has published the Final Crowdfunding Rules following their earlier meeting wherein the rules were adopted. Click here to view the final rules.