With the passing of the JOBS ACT in 2012, the SEC changed how capital is raised by allowing companies to use the Internet and social media to sell securities via general solicitation. Equity crowdfunding under these new regulations is used to facilitate financing online that has changed how capital is raised forever. Below is a brief overview of the new rules that permit selling securities online. CrowdEngine fully supports all of these new regulations:
Regulation D 506(c) (We support 506(b) as well)
(Unlimited Raise Amounts – Simple Form)
Regulation D provides the most common regulatory exemption used by crowdfunding portals today. It exempts private placement offerings under 506(c), which was adopted on September 23, 2013. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money from the general public using advertising, but can only sell to accredited investors (Reg. D 506b can have a max of 35 unaccredited investors per offering).
(Tier 2 – Up to $50 Million – Requires Approval)
Regulation A+ exempts a securities offering that does not exceed $20 million from SEC registration if certain requirements are met. However, businesses still must file an offering statement that includes an offering circular and financial statements with SEC, and SEC staff review filings for consistency with applicable rules and accounting standards.
Regulation A+ offers two tiers of offerings: the first tier for offerings of up to $20 million and the second tier for offerings of up to $50 million, each within a 12-month period.
Pros: The new regulation lets issuers:
- Streamline the government approval process by eliminating state filing requirements and allowing electronic filing
- Increase the funding maximum from $20 million in a 12-month period under original Tier 1 offerings, up to $50 million in a 12-month period (subject to individual investor limitations based on income)
- Permit general solicitation
- Allow Canadian investors to invest
- Offer tradable, non-restricted securities, unlike the other previously discussed regulations
- Preempt state securities laws that regulate the offering inside their borders
- Companies would still face significant pre-sale disclosure, on-going reporting obligations, and audited financial requirements
- Excludes asset-back securities
For a lot more information, see the SEC website here.
(Up to $1,070,000 from non-accredited investors – Requires SEC and FINRA Approval)
Regulation CF (“Reg CF”) was approved on October 30, 2015, allowing anyone in the US to invest in companies over the internet using regulated crowdfunding. Previously, private companies were generally allowed to solicit only accredited investors – those with a net worth of at least $1 million, excluding the value of their homes, or annual income of $200,000. These rules went into effect on May 16, 2016.
The JOBS Act is intended to help provide businesses with capital by making relatively low dollar offerings of securities and investments less costly. Congress included a number of provisions intended to protect investors who engage in these transactions, including investment limits, required disclosures by issuers, and a requirement to use regulated intermediaries.
Offerings under the new legislation can be made either via existing broker-dealers or via a new class of regulated registrants called “funding portals.” These portals have to provide enough information for investors to make an educated decision on the investment, as well as to conduct background checks on issuers, their owners, and their officers to reduce fraud risk. They also must make issuer information available on their portals for at least 21 days before securities can be sold, and enable conversations “among the crowd” about each offering in addition to having the option of a question-and-answer format.
Equity crowdfunding triggers the application of the federal securities laws because it involves the offer and sale of a security. Under the Securities Act of 1933 (“Securities Act”), the offer and sale of securities are required to be registered unless an exemption is available. Registered offerings are generally not feasible for raising smaller amounts of capital, as is done in a typical crowdfunding transaction, because of the high costs of conducting a registered offering and the resulting ongoing reporting obligations under the Securities Exchange Act of 1934 (“Exchange Act”) that may arise as a result of the offering.
Regulation CF added new Securities Act Section 4(a)(6), which provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions. To qualify for the exemption under Section 4(a)(6), crowdfunding transactions by an issuer must meet specified requirements, including the following:
- the amount raised must not exceed $1,070,000 in a 12-month period;
- individual investments in all crowdfunding issuers in a 12-month period are limited to:
- the greater of $2,200 or 5 percent of the lesser of the investor’s annual income or net worth, if either the investor’s annual income or net worth of the investor is less than $107,000; and
- 10 percent of annual income or net worth (not to exceed an amount sold of $107,000), if annual income or net worth of the investor is $107,000 or more; and
- transactions must be conducted through an intermediary that either is registered as a broker-dealer or is registered as a new type of entity called a “funding portal.”
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