What is the latest on crowdfunding at the federal and state levels?
Title III of the JOBS Act gave the Securities and Exchange Commission (“SEC”) 270 days to create rules allowing for crowdfunding, which is not defined in the JOBS Act but generally refers to the practice of a private company raising money through relatively small investments by a large number of people. Under Title III, a company may raise up to $1 million through crowdfunding, during any rolling 12-month period. Investors with an annual income or net worth of less than $100,000 may invest up to $2,000 or 5% of their annual income or net worth in a company, whereas those investors with an annual income or net worth of more than $100,000 may invest up to 10% of their annual income or net worth, not to exceed $100,000. Title III provided that companies raising money must file a disclosure document with the SEC containing information such as the names of the directors and officers, a description of the company’s business plan, and a description of the company’s financial condition, along with financial data including:
- For companies targeting an offering amount less than $100,000:
- The most recent tax return, and
- Financial statements certified by the chief executive officer.
- For companies targeting an offering amount greater than $100,000 but less than $500,000:
- Financial statements reviewed by an independent public accountant
- For companies targeting an offering amount greater than $500,000:
- Audited financial statements.
Title III also requires companies to annually file with the SEC and provide to investors financial statements and reports of operations. In addition, companies will have to conduct crowdfunding through either an SEC-registered broker or through an SEC-registered “funding portal.”
It has now been 816 days since the JOBS Act was enacted. The SEC released proposed rules on October 23, 2013, which set forward additional crowdfunding conditions, including requiring GAAP financial statements for the past two years. The proposed rules also included the disclosure document companies would file with the SEC, which is called Form C. The proposed Form C, which the SEC said would not be confidential, requires disclosures regarding the company’s business, officers, directors, capital structure and finances, and is similar to Form 1-A used in connection with Regulation A offerings, though perhaps not quite as burdensome. In the proposed rules the SEC stated that it anticipated the preparation and filing of the Form C could be performed in approximately 60 hours by outside counsel charging $400 an hour. The SEC imposed additional burdens on crowdfunding intermediaries, including that the broker/portal may not have any economic interests in the crowdfunded companies, and, rather alarmingly, suggesting that brokers/portals may be liable for any false statements or omissions in a crowdfunded company’s offering documents. Not surprisingly, there has been some concern in the start-up community that all of these strings that are being attached to crowdfunding will make it a less viable means to raise capital.
Most SEC-watchers expect the final rules implementing Title III to be promulgated later this year.
Note that the federal securities laws do provide for “crowdfunding” from accredited investors. Under Rule 506(c) of the Securities Act of 1933, which was created pursuant to Title II of the JOBS Act, companies may raise an unlimited amount of funds from accredited investors, and there are no limits on the amount each accredited investor may invest. (Accredited investor is defined in Rule 501, and includes directors and officers of the issuer and persons with a net worth of over $1,000,000, excluding residence, or income over $200,000 or joint income over $300,000.) As you probably know, Title II also required the SEC to eliminate the ban on general solicitation for private placements, which the SEC did last year.
Several states have stepped into the “retail” crowdfunding void. Georgia was one of the first states to pass crowdfunding legislation. Under Georgia Code 590-4-2-.08 (the “Invest Georgia Exemption”), any for-profit business entity organized in Georgia can raise up to $1,000,000 from Georgia residents, with non-accredited investors subject to a limit of $10,000 per investment and no limits on the amount an accredited investor may invest. The transaction must meet the requirements for the federal registration exemption for intrastate offerings available under Section 3(a)(11) of the Securities Act of 1933. (Please contact us for additional information regarding the Invest Georgia Exemption.)
As of the date of this writing, neither New York nor the District of Columbia has proposed or promulgated rules regarding crowdfunding.
To learn more about how your company can benefit from crowdfunding, as well as other funding alternatives, contact us at your earliest convenience.