The Role of the Crowdfunding Lawyer
Since the JOBS Act was signed into law in April 2012, market participants and observers have anticipated the release of the regulations governing equity crowdfunding. On October 23, 2013, the SEC released Regulation Crowdfunding. Many small business owners and advocates believe equity crowdfunding will make access to capital easier for startups and small businesses and fundamentally change the capital raising process.
While the public, and perhaps even some companies, may think of advertising and crowdfunding as the same thing, they are not. Crowdfunding is generally defined as raising small amounts of money from many people, rather than large amounts from a few. In recent years, it’s often been used to provide funding for disaster relief, political campaigns, and other “causes” of interest to many people. It is a concept and a technique.
The SEC doesn’t regulate concepts, but it does have jurisdiction over companies that choose to apply those concepts, and to those who participate in their application. As such, it is critical that companies engage a skilled crowdfunding lawyer to ensure compliance with the new rules.
General Solicitation and Rule 506(c)
Until Rule 506(c) became law, companies were forbidden to use general solicitation and advertising to promote their securities. Now it is permitted in conjunction with offerings of unregistered securities conducted pursuant to Regulation D. Companies are not required to advertise, and if that is their choice, they may use the “old” Rule 506, which does not allow solicitation of any kind. If they wish to advertise, they must use Rule 506(c). In a Rule 506 placement, there may be an unlimited number of accredited investors, and up to 35 unaccredited investors. Rule 506(c) permits advertising, but excludes non-accredited investors from participation. In addition, issuers will be expected to make an effort to verify whether their accredited investors qualify for that status. The SEC has suggested several methods they may use to accomplish that objective. Those methods are discussed here. A crowdfunding lawyer can ensure that you have the proper documentation and follow the procedures accepted by the SEC to verify accredited investor status.
The SEC has yet to implement new rules that will permit crowdfunding in Regulation D offerings and as of now, has several proposals pending. A skilled crowdfunding lawyer can keep you in check with the new crowdfunding rules as they are implemented.
The JOBS Act provides that “crowdfunding portals” or qualified broker-dealers may be used to raise money. The companies receiving the money may not advertise on their own behalf; the issuer can only direct interested parties to the portal being used. The portal operators’ job is only to match investors with issuers. They cannot offer investment advice, solicit sales, or handle investors’ money. They must register with the SEC and FINRA as investment portals.
If a company takes the crowdfunding route, it may raise no more than $1 million every 12 months from that offering or any other offering. In other words, if an issuer uses crowdfunding, it may not float any other kind of offering to raise additional funds until a year has passed.
There will also be strict limits on how much an investor whose net worth is less than $100,000 can spend, which will be the greater of $2000 or 5% of their income. If their worth is more than that, there is still a maximum investment size of $100,000.
The company will have to provide additional information to the SEC, depending on the amount of money to be raised. If its goal is, for example, $500,000 or more, audited financials will be required.
Implications for Issuers
General solicitation and crowdfunding will provide new ways for small businesses to attract investors; with luck, they will help them grow more quickly and easily than before. But the rules are complicated, and a failure to understand them could result in securities laws violations. For issuers seeking to go public, both crowdfunding and Rule 506(c) ease the burden of obtaining the shareholder base required by FINRA for a ticker symbol assignment. Companies should seek advice from an qualified securities lawyer before embarking upon the unknown.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Lawyer at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.
This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an lawyer-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Crowdfunding Lawyer
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855