SEC Issues Regulation Crowdfunding

On May 16, 2016, the U.S. Securities and Exchange Commission (“SEC”) issued Regulation Crowdfunding (“Reg CF”), the final rules on allowing non-public companies to offer securities to ordinary, non-accredited investors. If compliant with Reg CF, such offerings will not have to include all the complicated bells and whistles of a full-blown, SEC-registered offering.

Key issues regarding issuers:

  • Issuer may offer/sell up to $1,000,000 worth of securities in any rolling 12-month period
  • Issuer must disclose certain information on Form C regarding, among other things, the:
    • Amount and terms of the securities being offered
      • This must include a deadline by which the target offering amount is expected to be achieved
      • If the deadline arrives without the target having been met, the offering is to be cancelled and any deposit funds received from potential investors must be returned
    • Capital structure of the issuer, including the terms of currently outstanding securities
    • Identity and location of the issuer
    • Identity of issuer’s officers, directors and 20% owners
    • Issuer’s business description, including risk factors
    • Planned use of proceeds of the offering
    • Issuer’s financial condition (the specific level of required detail will depend on the size of the offering, but it may include audited financial statements and/or tax returns)
      • Financial disclosures must follow GAAP
  • Issuer must update Form C when
    • There have been material changes to the information previously provided
    • The offering reaches 50% and 100% of the targeting offering amount
  • Following a successful offering, issuer must begin filing annual reports (including financial statements) with the SEC and post the same on its website
  • Issuer will not be eligible for the exemption if it:
    • Is not a U.S. entity
    • Is already subject to public company reporting requirements
    • Is an investment company
    • Is disqualified under “bad actor” rules
    • Is not in compliance with Reg CF regarding prior exempt offerings
    • Has no specific business plan (or it plans to merge with an unidentified entity)

Key issues regarding investors:

  • Non-accredited investors may participate, but the amount of their investment is limited to:
    • The greater of (a) $2,000 or (b) 5% of the lesser of investor’s net worth or annual income, if investor’s net worth or annual income is less than $100,000; or
    • The lesser of (a) $100,000 or (b) 10% of the lesser of investor’s net worth or annual income, if investor’s net worth and annual income are both equal to or greater than $100,000
  • Investors must hold purchased securities for at least one year, except for securities
    • Repurchased by issuer
    • Sold to family members or related trusts, or in connection with the investor’s divorce or death
    • Sold to accredited investors
    • Sold in a registered offering

Key transaction mechanics:

  • Issuer must use a registered internet portal/intermediary as the exclusive medium for the offering
  • Issuer may not advertise the offering (other than notifications that specify the terms of the offering, identify the issuer and link to the intermediary—similar to a “tombstone” ad in a financial newspaper)
  • Certain communications through the intermediary’s site are permissible

If you have questions regarding Regulation Crowdfunding please contact Leech Tishman’s Corporate Practice Group. 

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