The Securities and Exchange Commission (SEC) is woefully late in finalizing its crowdfunding rules. However, the agency could finally be ready to sign off on the much-anticipated securities registration exception.
The Dodd-Frank Act authorized everyday citizens (non-accredited investors) to participate in equity crowdfunding. The relaxed securities requirements for equity crowdfunding are expected to be a game changer for startups and small businesses because it will allow them to raise money through smaller investments from a large number of people.
Congress tasked the SEC with drafting implementing regulations, a task that has been mired in delays. According to Bloomberg BNA, SEC Chair Mary Jo White stated late last month that the agency will adopt its crowdfunding rules in the “very near term.” This is good news given that it has been nearly two years since the SEC first published its rule proposal; and, that was nearly two years after the JOBS Act passed.
Provisions of the crowdfunding rules
As a reminder, some of the most significant provisions included:
Limits on capital raised: A company can raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
Investor caps: The rules place limits on the amount a person can invest over the course of a 12-month period. Investors with annual income and net worth of less than $100,000 can invest up to $2,000 or five percent of their annual income or net worth, whichever is greater. If either their annual income or net worth is $100,000 or more, the threshold increases to 10 percent of their annual income or net worth, whichever is greater, but investors would not be able to purchase more than $100,000 of securities through crowdfunding over a 12-month-period.
Disclosures by companies: Companies conducting crowdfunding offerings must file certain information with the SEC, as well as provide it to investors and the intermediary facilitating the transaction. These disclosures include information about officers and directors, the company’s business and financial condition, and the terms of the offering itself. If more than $500,00 is raised, expensive certified financials are required of the issuer.
Crowdfunding platforms: Crowdfunding transactions must take place through an SEC-registered intermediary, which can be either a broker-dealer or a funding portal. A “funding portal” does not have to register with the SEC as a broker-dealer, but must limit its operations to crowdfunding and cannot provide investment advice.
The SEC has received thousands of public comments. Many criticized the strict disclosure and reporting requirements, citing that compliance costs may put crowdfunding offerings out of reach for many small businesses. The biggest obstacle may turn out to be the requirement for certified financials. Yet many applauded the compliance requirements and the SEC’s making investment fraud deterrence a top priority.
It is unclear what White considers to be the “very near term.” Hopefully, it will be a matter of weeks rather than months. We encourage our readers to check back here regularly for updates and analysis.
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