On Friday morning (October 30, 2015), the Securities and Exchange Commission voted 3-1 to approve final rules relating to equity crowdfunding to non-accredited investors.
What Does the Vote Mean?
Until now, businesses have been able to raise funds from the "crowd" in one of two ways. First, companies are able to raise funds in exchange for rewards (such as pre-order of products, shout out on Twitter, etc.) through websites such as Kickstarter. While this type of fundraising is helpful for many companies (see our article on the many benefits of crowdfunding), the company's funders do not become investors in the company--they only receive the reward that they are promised when they pledge money.
Second, businesses are able to raise money in the form of investment from accredited investors under Rule 506(c) of Regulation D under equity crowdfunding platforms. Because the threshold for qualifying as an accredited investor was high (essentially $200,000 in annual income or $1 million in net worth excluding primary residence), it excluded the majority of the American population from engaging in crowdfunding.
However, the Friday vote ushers a new era of fundraising for small businesses and startups. With the new rules, startups and small businesses can raise money from individuals even if they do not qualify as accredited investors. This is the broad-based equity crowdfunding that Congress envisioned when it passed the JOBS Act.
What is the JOBS Act?
The Jumpstart Our Business Startups Act (commonly known as the JOBS Act) was signed into law on April 5, 2012. Title III of the Act, titled Crowdfunding, required the SEC to adopt rules under Rule 4(a)(6) of the Securities Act of 1933 to make it possible for small businesses and startups to raise funds from non-accredited investors. On October 23, 2013, the SEC proposed rules for adoption and implementation of Title III crowdfunding. On October 30, 2015--more than 3 years after the passage of the JOBS Act--the SEC voted to approve final rules relating to crowdfunding for small businesses and startups.
So What Can Small Businesses and Startups Do Under the New Crowdfunding Rules?
As of the writing of this post, the SEC has not publicly released the final rules relating to crowdfunding under Title III of the JOBS Act. However, it is clear that once the new rules become effective in 2016, small businesses and startups can raise money through crowdfunding from non-accredited investors.
We will write a more in-depth analysis of the final rules once they are published from the SEC, but below are a few preliminary notes about some of the details that are known now:
- Companies may raise up to $1 million in reliance on the Title III crowdfunding rules in a given year.
- There is a cap of how much non-accredited individuals can invest in a given year (varies depending on their level of income or net worth, but not to exceed $100,000).
- Companies wishing to participate in equity crowdfunding from non-accredited investors must do so through traditional broker-dealers or through registered online crowdfunding platforms (which may be able to take an equity stake in the companies).
- Companies will need to disclose information about the company and the investment to the public, although it can be done in a streamlined question-and-answer format.
- Companies that are crowdfunding for the first time will not need to provide audited financials (though they will need to either have them certified by their own financial officers or audited by an outside firm depending on the amount of the financing).
Summary
While the new SEC rules bring about a massive opportunity for small businesses and startups to raise much needed funds, the implementation and impact of these rules remain to be seen. Only time will tell how widespread the adoption of crowdfunding will be--both from a business and an investor perspective. Even with the opportunity for crowdfunding, it may be in the interest of some businesses to consider its downsides. For example, startups with venture capital aspiration may want to consider its impact on their ability to raise more money from larger institutional investors.
If you want to discuss whether equity crowdfunding may be right for your businesses, and how to prepare your business for equity crowdfunding, please contact our office for a consultation.
As mentioned above, we will write a more in-depth analysis of the new rules once the final text becomes available from the SEC.
DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.
