Equity Crowdfunding Approved – Going Public Attorney
The Securities and Exchange Commission voted 3-1 to approve the long awaited equity crowdfunding rules. Equity Crowdfunding was adopted pursuant to Title III of the Jumpstart Our Business Act (JOBS Act). As adopted today, the rule allows companies to raise up to $1 million every 12 months in a crowdfunding campaign using an online funding portal or registered broker-dealer.
While the rules do allow non-accredited investors to participate, there are caps on the amounts that may be invested. Commissioner Michael Piwowar had harsh statements for the new rule pointing out the risks to both investors and small companies who failed to comply with the myriad of confusing and complex requirements of the equity crowdfunding exemption. He stated, “I fear that many traps for the unwary are hidden in the regulations, creating potential nightmares for small business owners that fail to place regulatory compliance at the top of their business plans. Such burdens will spook many small businesses from pursuing crowdfunding as a viable path to raising capital“
Both accredited and non-accredited investors will be able to invest in equity crowdfunding but only up to the lesser of their net worth or annual income. If an investor’s income is less than $100,000, the investor may only invest up to $2,000 (or 5% of annual income or net worth) per 12-month period. If an investor’s net worth and income are above $100,000, the investor may invest the greater of 10% of annual income or net worth up to $100,000. Commissioner Piwowar was quick to point out that even “Warren Buffet could only invest $100,000 in an equity crowdfunded offering”.
One key cost saving benefit of equity crowdfunding is that issuers do not have to provide investors with audited financial statements. Companies seeking to raise less than $100,000 may self-certify their financial statements as accurate. Companies seeking to raise between $100,000 and $499,999 to have their financial statements reviewed by an outside accountant (not an auditor). Companies seeking to raise between $500,000 and $1,000,000 must have their financial statements reviewed (not audited) by an outside auditor. Issuers must provide investors with specific disclosures that include a basic description of their business, management and the offering.
At the end of the day, observers wonder whether the rules for equity crowdfunding provide benefits not offered by Rule 506(c) or Regulation A+. As Equity Crowdfunding now stands, even without the expense of audited financial statements, compliance may prove to be too complicated and costly for most small companies due to the maximum investment caps imposed by the rule.
Equity Crowdfunding will become legal 180 days after the new rules are published in the Federal Register.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855