Tuesday, November 10, 2015

What You Really Need to Know About Regulation Crowdfunding

Regulation Crowdfunding was finally adopted by the SEC, as detailed in this release (all 686 pages of it) several days ago. Even my nine year old was amused by the irony of a 35-page section of the release related to the “Paperwork Reduction Act”…

Frequent readers know that I first started writing about “equity crowdfunding” all the way back in November 2011, before the JOBS Act was even called the JOBS Act! They also know that I predicted in this later post that the SEC would miss the deadline for adopting required rules relating to equity crowdfunding, which was late in 2012. While I might have expected that the rules would be delayed long enough to have a baby, I didn’t realize that you’d also have time to get that child off to preschool!

There are already dozens of law firm summaries of the release ranging from two-pagers (that really don’t tell you much about the meat of the regulation) to 15-pagers that sound like they were written by a bunch of lawyers (which, to be fair, they were). While I won’t try to detail all of the regulation here, I will try to tell you what you really need to know:
  • You can’t yet sell equity under Regulation Crowdfunding. The regulation will become effective 180 days after publication in the Federal Register, likely in May of next year. The form permitting the establishment of a funding portal will become effective on Jan. 29, 2016, presumably to permit portals to rollout simultaneously with the Regulation in the second quarter.
  • The maximum gross amount you can raise in a Crowdfunding offering (before paying any offering expense, including the expenses of a funding portal or licensed broker-dealer) is $1 million during any 12-month period.  The good news is that the SEC made it clear that you can still raise other private capital the “old-fashioned” way (in an exempt offering).
  • You probably won’t be able to complete a Crowdfunding offering all by yourself.

        o As mentioned above, you must conduct a Crowdfunding offering through
                either a funding portal or a licensed broker-dealer.

        o You’ll need the services of an independent accountant because 
                financial statements are required and they must be reviewed 
                or—if you are raising over $500k and it isn’t your first equity 
                Crowdfunding offering—audited by one.

        o While the SEC adopted a XML-based fillable Form C, which 
                includes an optional Q&A format, must be filed with the SEC, 
                the rules require quite a bit of disclosure, both before and after 
                the offering. Required disclosures include:

                 --Details regarding the securities and the offering parameters;
                 --The Company’s financial condition and the reviewed or audited 
                          financial statements;
                 --A description of use of proceeds, the business, and business plan;
                 --The Company’s ownership and capital structure;
                 --Information regarding officers, directors, and owners of at 
                          least 20 percent of outstanding equity;
                 --Details regarding intermediary identification and compensation;
                 --Risk factors and certain legends (lawyer stuff, right?); and
                 --Related-party transactions

  • You’ll have to file annual reports with the SEC within 120 days after the end of your fiscal year, unless you’ve:

               o Filed at least one annual report, if you have fewer than 300 
                        shareholders of record;
               o Filed three annual reports and your total assets are not in 
                        excess of $10 million;
               o Become a reporting  (public) company;
               o Repurchased all the crowdfunding shares; or
               o Liquidated or dissolved.

  • If you plan to raise any significant amount of capital, you’ll likely be taking on a lot of new shareholders. The annual per shareholder limits (which are aggregated in all Crowdfunding offerings) are pretty small:

               o For investors with annual income OR net worth less than $100k,
                        the most they can invest in all crowdfunding offerings annually 
                        is the greater of $2k or 5 percent of the lesser of annual income
                        or net worth.
               o For investors with annual income AND net worth of at least 
                        $100k, the most they can invest in all crowdfunding offerings 
                        annually is 10 percent of the lesser of annual income or net worth.

  • If you want to be able to exclude crowdfunding investors from your shareholder count to avoid having to become a reporting company (probably a good idea if you expect to have many small investors, which could otherwise force you over the limits and require such registration ), you’ll need to:

               o Be current in your annual reports required under the rules;
               o Have total assets of less than $25 million; and
               o Engage a registered transfer agent to handle such matters.

  • There are a bunch of other limitations involved, including limitations on what and how you can advertise your Crowdfunding offering and a restriction on the transfer of the shares for one year, unless they are being transferred back to the issuer, to a family member, or to an accredited investor.

This is just a high level summary of the hoops you’ll need to jump through to raise money under Regulation Crowdfunding. My guess is that the regulation will ultimately prove to be a useful way for some companies to raise some of the early-stage capital they need, particularly for businesses that are consumer facing or have a large group of “followers” who might be willing to dig into their pockets. I know it will be another tool in my toolbox for helping companies in their quest for capital. Time will tell if the expenses and complexity made it worth the wait.


  1. Dan - as always, you do a brilliant job of laying out the complicated in easy to understand (almost layperson's :) terms. Thank you for the great overview. Hope you don't mind if we use some of your overview on our MNvest.org website (with proper attribution of course :)

  2. Thanks for the comment. I tried to get to the high points in as non-lawyerly a fashion as is possible for a lawyer (I know I sometimes can't help sounding like a lawyer...). Feel free to use some of the overview. Thanks again for the comment!