Important Equity Crowdfunding Facts for Entrepreneurs
Entrepreneurs have a lot to learn to be fully prepared for equity crowdfunding. At truCrowd we are currently working on a series of educational whiteboard videos to help both issuers and investors make smart decisions, but there is a lot you can learn right now. Today.
We have good amount of information to cover so I will keep the introduction brief. Here are five facts every entrepreneur must understand about equity crowdfunding:
1.) Equity Crowdfunding Eligibility
Before we get too far, let’s make sure your company is eligible for Title III equity crowdfunding. Rule #1 – you have to be based in the United States. Rule #2 – you are not already an SEC reporting company. There are many other rules aside from these two, but they are the first two hurdles to jump. In addition, here are four eligibility requirements to know upfront that will not allow you to create an offering:
• companies disqualified under Section 302(d) of the JOBS Act and Proposed Rule 503 (which includes, among other things, certain designated “bad actor” disqualifications)
• previous crowdfunding issuers that have failed to comply with the applicable annual reporting requirements during the two years prior to a new offering
• companies that have no specific business plan
• companies whose sole business plan is to engage in a merger or acquisition with one or more other companies
2.) What You Have to Disclose
This is a long list so I will get right to it – here is what the SEC is mandating from every equity crowdfunding issuer:
• the issuer’s name, legal status, physical address and website address
• information about officers and directors as well as owners of 20 percent or more of the issuer
• a description of the issuer’s business, anticipated business plan, planned use of proceeds from the offering and financial condition
• disclosure of the current number of employees, material terms of any indebtedness of the issuer and any exempt offerings conducted within the past three years
• the proposed public offering price, target offering amount, deadline to reach the target amount and whether the company will accept investments in excess of the target amount
• disclosures concerning certain types of related-party transactions
• information about the intermediary, including its compensation
• a description of the issuer’s ownership and capital structure
• financial statements of the company
• a discussion of the material risks associated with the investment
• certain mandatory legends
3.) How Much You Can Raise in One Year
The total amount an eligible issuer can raise in one calendar year is $1,000,000. If you need more than this amount in this period of time, you may need to reconsider your approach to raising capital. Equity crowdfunding is an amazing source of capital for issuers seeking $10,000, $100,000 or up to $1,000,000, but you’re capped at seven figures. If you need more than what the SEC allows, it may be worth going over your business plan and reassessing your goals.
However, it is important to know that only capital raised in reliance to the 4(a) (6) crowdfunding exemption will count toward the limit. Should you raise capital any other way, the SEC will not integrate offerings outside of equity crowdfunding toward your $1,000,000 equity crowdfunding limit. In short – the $1,000,000 you are allowed to raise in 12 months with equity crowdfunding can be legally supplemented by any other exempt offering.
4.) The Obligations of the Intermediary
Funding portals like truCrowd and broker-dealers both have mandatory obligations to uphold with each offering. These obligations ensure a legal and professional hosting and transaction process for all issuers. Here are four of the basic requirements for all intermediaries:
• The intermediary must disclose how much it will be compensated when an issuer or investor opens an account. The intermediary must also disclose the manner in which it will be compensated.
• Funding portals may compensate for the referrals of issuers and investors as long as the compensation is not transaction-based. However, the compensation can be transaction-based if the payee is a broker-dealer.
• Broker-dealers are allowed to pay transaction-based compensation to registered persons for referrals, but cannot pay funding portals for referrals.
• It is illegal for funding portals to compensate anyone for soliciting issuers or investors.
5.) How Much You Can Advertise
• Issuers may distribute a limited notice (via blog, website, and other online channels excepting social media).
Dissemination of the notice must be restricted to Texas. The content of the notice is limited to a statement that the issuer is conducting an offering, the name of the platform through which the offering is being conducted (truCrowd), and a link directing potential investors to truCrowd’s website. The notice must contain a disclaimer that the offering is limited to Texas residents and offers and sales of the securities appearing on the Internet website are limited to persons who are Texas residents.
Follow the link for more details about online promotion regulations : http://trucrowd.is/1EZj07M
• Funding portals cannot fully advertise your offering for you, but they can advertise their own services and distinguish a few issuers or offerings in the process. This would be similar to a “Featured” list of offerings or offering examples for potential investors to view as a sample of the funding portal experience.
• The issuer and the company’s employees may start or join any discussion on the portal’s communication channels as long as they properly identify themselves. truCrowd will have an extensive communication system with public forums, offering forums, private messaging and internal email. We have designed our communication strategy to provide flowing channels of interaction.
That was certainly a lot of equity crowdfunding facts for one sitting. Please take the time to reread and familiarize yourself with the content to be 100% confident in your crowdfunding knowledge and capabilities. Leave your comments below!