On October 30, 2015, the Securities and Exchange Commission approved new rules for equity crowdfunding by companies as part of the JOBS Act (Title III), also known as Regulation Crowdfunding. The rules will become effective May 16, 2016. Here is a summary of the basic rules every business should know if it is looking to raise capital under the new crowdfunding regime.
- Caps for businesses and single investors. Businesses can raise only up to $1 million in equity crowdfunding in any 12-month period.
- Permitted Investors. Investors are limited to investing (in all Regulation Crowdfunding offerings by any issuer during any 12-month period):
- the greater of $2,000 or 5 percent of the lesser of the investor’s annual income or net worth (to be calculated in accordance with Regulation D), if the annual income or net worth of the investor is less than $100,000; or
- 10 percent of the lesser of the investor annual income or net worth (not to exceed an amount sold of $100,000), if both of the investor’s annual income and net worth are $100,000 or more.
- During any 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
- Required Use of Intermediary. The capital raise must be conducted through an intermediary that is registered as either a broker-dealer or as a funding portal. A company may only use a single intermediary’s online platform during any particular crowdfunding transaction.
- As with all equity trading, guidelines are strict. An experienced business attorney in Los Angeles should be helping your company in all aspects of SEC compliance, and crowdfunding equities should be on the agenda. You will have to disclose information about company finances, investors, goals of the crowdfunding and more. A company may not advertise the terms of the offering outside of the broker or funding portal facilitating the offering. However, a company may publish notices of the offering in newspapers or social media sites or the issuer’s website that include:
- a statement that the issuer is conducting an offering;
- the name of the intermediary;
- a link to the intermediary’s online platform;
- certain limited terms of the offering, including (i) the amount of securities offered; (ii) the nature of the securities; (iii) the price of the securities; and (iv) the closing date of the offering period; and
- factual information about the legal identity and business location of the issuer.
- Sliding Scale of Financial Disclosure Requirements. Issuers are required to file with the SEC and provide to intermediaries and prospective investors a sliding scale of financial information based on the aggregate target offering amount under the crowdfunding exemption within the preceding 12-month period.
- Shares are locked in place for 12 months. Securities issued in a
crowdfunding transaction may not be resold by any purchaser for a period of one year unless such securities are sold or transferred: (i) to the issuer of the securities; (ii) to an accredited investor; (iii) as part of a registered offering; or (iv) to a family member in connection with the death or divorce of the purchaser.
There are many other rules and restrictions that a business must navigate in order to properly conduct a capital raise under Regulation Crowdfunding. A highly qualified business attorney in Los Angeles such as Afshin Hakim of Hakim Law Group, one of the leading corporate law firms in Los Angeles, will handle all the dealings of your startup, including capital raises through crowdfunding or other more traditional approaches. For all inquiries please contact us at 310.993.2203 or visit www.HakimLawGroup.com for further information.
