SEC Adopts Crowdfunding Securities Rules

The SEC adopts rules to permit securities based crowdfunding for small businesses and start up companies

A relatively low dollar capital raising vehicle for startups and small businesses will be unleased soon. The Securities and Exchange Commission (“SEC”), consistent with the requirements of the 2012 Jumpstart Our Business Startups Act (“JOBS Act”), adopted final rules to offer and sell securities through crowdfunding (SEC proposed rules were published in October, 2013 with over 485 comment letters received). These rules are referred to as Regulation Crowdfunding under new Section 4(a)(6) of the Securities Act of 1933. Regulation Crowdfunding will likely become effective in May 2016, 180 days after the new rules are publised in the Federal Register.

SEC Adopts New Crowdfunding Securities Rules

Crowdfunding is a process where an entity or individual raises funds for some stated purpose by seeking small individual contributions from a large number of people via internet. In general, interested individuals are members of the “crowd” and information may be shared about the project, cause, idea or business to decide whether to fund the endeavor. Up until now, U.S. securities-based crowdfunding has not existed as current U.S. securities laws are onerous and generally not workable for such transactions. The JOBS Act provided a federal exemption under the securities law so that eligible small businesses could access and raise capital through crowdfunding securities transactions.

Under the new rules, an eligible company may raise up to an aggregate maximum of $1 million in a 12-month period preceding the expected date of sale (including the expected amount the issuer plans to raise in a current transaction). For investors, the aggregate amount of securities purchased in a 12 month period through all crowdfunding offerings may not exceed $100,000, or less depending on the investor’s annual income and net worth. For more on the annual income and net worth requirements, including example calculations, please press the download Carrtegra Consulting Brief button below.

Companies eligible to use the crowdfunding exemption must:

  1. be US domiciled
  2. not be a current Exchange Act reporting company
  3. not be an ineligible investment company
  4. not be a company that is subject to disqualification under Regulation Crowdfunding,
  5. not be a company that has failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years preceding the offering statement filed
  6. not have a specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company.

Crowdfunding securities generally cannot be resold for a one year period.

Issuers must disclose, among other things:

  1. General information about officers and directors and greater than 20% owners
  2. A description of the issuer’s business and the anticipated business plan
  3. Use of proceeds (purpose and intended use)
  4. The offering price or the method to determine the offering price, the target offering amount and deadline to reach the target and whether and how much oversubscriptions will be accepted
  5. Certain related party transactions
  6. A discussion of the issuer’s financial condition (results of operations, liquidity and capital resources)
  7. A description of the issuer’s capital structure and ownership
  8. Certain US GAAP financial statements and tax information as follows:
    1. For offerings of or less than $100,000, full financial statements certified by the principal executive officer to be true and complete in all material respects and accompanying tax return information(total income ,taxable income and total tax), unless audited or reviewed financial statements are available and therefore filed, in which case the certification and tax return information are not required.
    2. For offerings greater than $100,000 up to $500,000 full financial statements reviewed by an independent auditor (including first time offerings in this range) unless audited financial statements are already available and therefore filed.
    3. For offerings greater than $500,000, full audited financial statements (does not apply to first time offerings)

Crowdfunding issuers will be required to file annual reports with the SEC and post them to their websites by 120 days after their fiscal year end. Financial statements included in the annual report need not be audited but they will require true and complete certification in all material respects from the principal executive officer. If audited or reviewed financial statements are available, they must be provided in lieu of unaudited financial statements.

Small businesses and startups who are interested in Regulation Crowdfunding securities offering should consider connecting with qualified securities counsel. Moreover, such companies may consider enlisting the services of an accounting firm to assist in financial statement preparation, business planning and internal accounting systems and controls.

To get a FREE copy of today's Carrtegra Consulting Brief addressing Regulation Crowdfunding investor limitations, simply click this button and you will be taken to the download page.

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Sam H. Carr is the Managing Partner of Carrtegra, LLC. Sam has over 30 years of experience in accounting, auditing, financial management and consulting. Sam has focused much of his career on process improvement and redesign. Sam holds an MBA and is a CPA, CIA, CISA and a Certified Compliance and Ethics Professional (CCEP). Sam is a finance and operations executive with broad-based experience that includes 12 years as a CFO or Chief Accounting Officer in both public corporations and private entities, and fourteen years with an international public accounting firm. Sam orchestrated an Initial Public Offering of a consolidation of dental practices throughout the United States. In addition to his IPO experience, he owns a powerful track record of demonstrated skills in a wide range of business environments including designing financing, mergers and acquisitions and growth companies. Sam has been the Chief Executive of a management consulting firm for the most recent 10 years. Sam’s focus has been substantially on quality of services and valued solutions as well as client and employee retention.