Last Friday, the SEC adopted final rules to allow companies to offer and sell securities through crowdfunding. These new rules are designed to give smaller companies access to additional investment options and, in addition, to provide investors with additional protections.
As I discussed in a prior blog post here, crowdfunding is a method of raising capital through the Internet. However, crowdfunding has not generally been used to buy or sell securities because the offering of a share of profits from a business endeavor could trigger the application of federal securities laws, which requires the offeror to register the offering with the SEC or find an available exemption from registration.
The JOBS Act of 2012 included a new exemption to permit securities-based crowdfunding. Ever since the passage of the JOBS Act, investors and startups have been waiting for the SEC to draft its final rules implementing this so-called “crowdfunding exemption.” These final rules now allow startups to raise money through crowdfunding without having to go through the complicated and costly securities registration process.
The final rules include the following highlights:
— A company may now raise an aggregate amount of $1,000,000 through crowdfunding offerings in a 12-month period.
— Individual investors may now participate in crowdfunding offerings up to (a) 10% of the lesser of their annual income or net worth, for those investors with with an annual income and net worth equal to or greater than $100,000; or (b) $2,000 or 5% of the lesser of their annual income or net worth, for all other investors.
— During any 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding activities cannot exceed $100,000.
— A company that uses these rules to conduct a crowdfunding offering must file certain information with the SEC and make certain disclosures to investors.
— Crowdfunding portals are required to register with the SEC, become a member of a national securities association, provide investors with “education materials” and other information about the offering, take measures to reduce the risk of fraud, provide “communication channels” to permit discussions about offerings on the platform, provide disclosure to investors about the compensation received by the portal, among other things.
The final rules become effective 180 days after the date they are published in the Federal Register. You can read more about them here.