SEC Adopts Rules for Equity Crowdfunding
In early October 2015, we published an article titled “Real Estate Crowdfunding – Navigating the Securities Laws” which discussed the use of the internet to raise capital for real estate investments and the applicable securities laws and regulations, including the proposed “Regulation Crowdfunding.” As anticipated, on October 30, 2015, the U.S. Securities and Exchange Commission (SEC) adopted Regulation Crowdfunding, which permits and prescribes rules governing the offer and sale of securities through the internet, exempting crowdfunding securities from registration with the SEC if the applicable conditions are met. Similarly, it conditionally exempts securities sold in a crowdfunding offering from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934.
Investment Caps and Restrictions
The final rules under Regulation Crowdfunding allow issuers up to $1 million of offerings in any 12-month period. While both accredited and non-accredited investors can participate, all investors will be subject to certain limits on the amount they can invest over a 12-month period. If an investor’s annual income or net worth is less than $100,000, then such investor is limited to the greater of $2,000 or 5% of the lesser of their annual income or net worth. If both of an investor’s annual income and net worth are equal to or greater than $100,000, then the limit is 10% of the lesser of the investor’s annual income or net worth. However, in all cases, an investor’s aggregate investments through crowdfunding during the 12-month period may not exceed $100,000.
The Role of Intermediaries
Under Regulation Crowdfunding, issuers are required to use an SEC-registered intermediary – a broker-dealer or a funding portal – to facilitate the offerings over the internet. Intermediaries play an important role in the crowdfunding process as they are responsible for, among other things, making the information that an issuer is required to disclose publicly available and providing investors with educational materials that explain the process for investing, the types of securities being offered, resale restrictions and investment limits. They are also responsible for obtaining information from each investor sufficient to ensure compliance with the individual investment limitations.
Effectiveness of Final Rules
The new crowdfunding rules and forms will become effective 180 days after being published in the Federal Register, and the forms enabling funding portals to register with the SEC will become effective on January 29, 2016. The vast majority of all material provisions of the proposed rules have been adopted in the final rules.
Crowdfunding offers companies a unique opportunity to raise funds in relatively smaller amounts and provides access to a large number of potential investors. That said, an equity offering raises complex securities law issues that require appropriate legal review to ensure regulatory compliance.
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