Who can get funded via equity crowdfunding?
Under the Proposed SEC Rules, U.S. companies other than investment companies, companies required to file reports under the Securities Exchange Act of 1934 (the “Exchange Act”), blank check companies, companies without a specific business plan and certain bad actors, may be eligible to rely on an exemption from Securities Act registration under the JOBS Act crowdfunding exemption (Section 4(a)(6) of the Securities Act) to issue up to $1 million during a 12-month period in crowdfunding transactions. In applying the $1 million limit, an issuer must aggregate the amount of securities that it proposes to issue with any securities sold by its affiliates in reliance on the exemption during the same period. There is no limitation on investor sophistication or financial wherewithal, other than limits on each investor’s maximum annual investment in offerings relying on the crowdfunding exemption, as described in the accompanying sidebar.
Types of securities transacted via equity crowdfunding:
Any form of security may be eligible for the exemption, including equity or debt. Use of the crowdfunding exemption is not exclusive; an issuer may also rely on other exempt offerings provided that the issuer complies with the requirements of each exemption relied upon. An exempt crowdfunding offering may only be conducted through a registered broker-dealer or registered funding portal, and each offering may only be conducted through a single intermediary. All crowdfunding transactions must occur exclusively through the intermediary’s Internet website or similar electronic medium (a “platform”), and such offerings must be “electronic-only.”
Who is eligible for this type of funding?
To be eligible for the exemption, issuers must file a Form C through the SEC’s public EDGAR system and disclose a broad range of information, which includes the issuer’s business, officers, directors, principal existing shareholders, offering risk factors, target offering size, description of the securities being offered, the issuer’s capitalization and any existing debt, intended use of the proceeds, and the compensation to be paid to the intermediary. In addition, issuers must provide financial statements prepared in accordance with GAAP that, depending on the amount of securities that the issuer is offering and has offered via crowdfunding in the preceding 12 months, must be certified by the issuer’s principal executive, or reviewed by or audited by an independent accountant. A narrative discussion of financial results must also be provided. So long as the securities issued in the crowdfunding offering remain outstanding and the issuer is not an Exchange Act reporting company, the issuer will be required to file annual reports providing updated disclosures and financial statements. An issuer also must file regular updates on its progress in meeting the target offering under cover of Form C, which the intermediary must make available to investors and potential investors through its platform.
Advertising and re-sale of securities issued via equity crowdfunding
No advertising would be permitted for crowdfunding offerings (and no compensation may be paid by an issuer for promotional activities to be conducted) other than through the platform or limited “tombstone”-type notices directing investors to the platform. Issuers must take reasonable steps to ensure that any person who receives compensation to promote an offering of its securities in a crowdfunding transaction through an intermediary’s platform discloses its compensation in all communications.
Re-sales of securities issued in an exempt crowdfunding offering would be restricted for one year, subject to certain exceptions such as sales to the issuer or an accredited investor, but freely tradable thereafter.
Here is the full (9 pages) Memorandum that explain very well more about equity crowdfunding at the moment when the final rules are not yet final.
What do you think? Any comments are welcomed and appreciated. Thanks!