The Equity Crowdfunding Rules: What You Need to Know

04 May 2016 Technology Transactions Today Blog

The SEC’s equity crowdfunding rules finally go into effect this month almost four years after Congress passed the JOBS Act, requiring the relaxing of certain rules on raising funds. So what does equity crowdfunding actually look like? Here is a primer:

  • Non-public US companies may raise funds on the internet from accredited and non-accredited investors alike
  • Crowdfunding must be conducted through SEC approved fundraising portals that are manages by registered broker-dealers (i.e., not the company’s own website)
  • The amount raised cannot exceed $1,000,000 in a 12 month period
  • Individual investors with annual income under $100,000 are limited to investing the greater of $2,000 or 5% of their net worth. Individual investors with annual income of at least $100,000 are limited to investing 10% of their annual income or net worth, whichever is lower, subject to a total limit of $100,000.
  • Prior to the start of fundraising, the company must file with the SEC a new Form C, which requires a fairly detailed disclosure of corporate and financial information
  • The public filing must include financial statements, which must be certified by a company officer if less than $100,000 is being raised, which must be reviewed by public accountants, if between $100,000 and $500,000 is being raised, and which must be audited if more than $500,000 is being raised
  • There are additional annual post-sale public filings required for at least one year

There is no denying that the pool of potential investors is larger with these crowdfunding rules, but the limitations (size of the offering and caps on individual investment), the required use of funding portals, and the regulatory burdens (disclosure, audit and filing requirements) diminish what many thought would really open up fundraising possibilities.

I continue to believe the most effective way to raise real capital for most startups is probably with a standard private placement, including perhaps under the relaxed rules regarding general solicitations (i.e., public advertisements) under Regulation D. This limits (in most cases) the pool of investors to accredited investors, unless the company makes extensive public disclosures, but accredited investors are generally able to write larger checks, and there is no limit on the amount a company can raise.

Using a general solicitation under Regulation D, the company can advertise its fundraising (via website, broadcast or print media) so long as it only sells securities to accredited investors. This would require some work to confirm the investor is accredited, but it doesn’t involve the disclosure and filing requirements of crowdfunding.

Make sure to check out our other JOBS Act provisions posts, including the expansion of Regulation A.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services