If you’ve ever dreamed of investing in a start-up, your time may be coming. Late last month, the SEC finalized crowdfunding rules under the Jumpstart Our Business Startups (JOBS) Act, which enables companies to offer and sell securities through this popular fundraising method. Securities-based crowdfunding essentially allows entrepreneurs to build capital via the internet by reaching investors all over the world who are interested in purchasing equity in their start-up or other privately held small businesses.
This opportunity was previously reserved for the elite few. Before the new rules, private companies could seek money only from “accredited investors,” defined as individuals who own more than $1 million in assets, excluding their primary residence, or those who have maintained an income of more than $200,000 for at least two years.
Under the new rules, those with more modest wealth will be able to invest in start-ups, giving investors access to a much wider pool of the population to help them start their businesses. People with an annual income or net worth of less than $100,000 will now be allowed to invest a percentage of their yearly income or net worth, with particular limits. Those with higher incomes can invest more.
There are certain conditions, meant to provide protection for investors. The rules limit the amount of money an issuer can raise through crowdfunding and require companies offering securities through crowdfunding to make numerous disclosures about their business and securities offerings, including a discussion of the company’s financial condition, a description of the business, the price and terms of the securities being offered, how they will use the money, a list of officers and directors, and information about anyone who owns at least of 20% or more of the company.
Under the new SEC rules:
- Companies will be permitted to raise a total of $1 million through crowdfunding in a 12-month period
- In a 12-month period, individual investors can invest in crowdfunding offerings up to the following amounts:
- If either their annual income or net worth is less than $100,000, they can invest the greater of $2,000 or 5% of the lesser of their net worth or annual income
- If both their annual income and net worth are at least $100,000, they can invest 10% of the lesser of those numbers
- An individual can’t invest more than $100,000 in crowdfunding offerings during a 12-month period
Investors generally can’t resell their crowdfunding securities for one year unless they are transferred to the issuer, an accredited investor, to certain members of the purchaser’s family, to the purchaser’s trust or a family trust, or in connection with the purchaser’s death or divorce.
Companies offering securities through crowdfunding will also be required to file financial statements with the SEC, which may need to be reviewed by an independent public accountant or audited by an independent auditor, depending on the amount offered and sold during a 12-month period. The audit requirement would be softened to a review requirement for certain companies offering securities through crowdfunding for the first time.
The SEC also specified that crowdfunding must go through an intermediary, either a broker-dealer or a registered funding portal. In addition, the new rules create a regulatory framework for the funding portals, specifying that they must register with the SEC and become members of a registered national securities association (i.e. FINRA). This rule becomes effective on January 29, 2016.
The rest of the crowdfunding rules will take effect 180 days after they are published in the Federal Register, on May 16, 2016.
The new rules adopted by the SEC are designed to give small businesses more access to capital while providing protection for investors. However, the significant disclosure and reporting obligations the rules impose on companies and the specific limits for investors can be complex. If you’re considering crowdfunding as a way to fund your start-up or if you’re an investor looking to get in on the ground floor of a new business, JLK Rosenberger is here to help. For more information about the new rules, including regulatory requirements, how much you are eligible to contribute, and how to protect your investments or your new business, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon!