New SEC Rules Make It Easier To Crowdfund Investment Capital
Raising investment capital got a little easier last month, because Title III of the Jumpstart our Business Startups Act (“JOBS Act”) went into effect. Title III allows businesses to crowdfund investment capital from Americans of all financial backgrounds. Before Title III, generally, businesses could only crowdfund from wealthy investors.
The JOBS Act was signed into law in 2012 to increase funding to startups and small businesses and to ease the security regulations that restricted everyday Americans from investing in businesses. Previously, if a business wanted to raise investment capital in exchange for equity in the business, generally, that business had to either register with the Securities and Exchange Commission ("SEC") or only solicit investments from "accredited" investors—individuals that earn more than $200,000 per year or have a net worth of over $1 million. Title III focuses on permitting companies to offer and sell securities to Americans of all financial backgrounds through crowdfunding platforms (the reason why the SEC refers to it as the "Regulation Crowdfunding").
While many businesses have used crowdfunding sites, such as Kickstarter or Indiegogo, to raise capital, these sites operate on a rewards and not an equity basis. For example, a chef soliciting investments via Kickstarter to start a restaurant, could offer a gift certificate or a free meal or a t-shirt of the restaurant in return for an investment, but the chef could not offer equity in the restaurant without registering with the SEC or restricting the crowdfunding to accredited investors. By offering the gift certificate, free meal, or t-shirt, the chef was not selling securities and, thus, did not have to register with the SEC.
Title III enables businesses to more freely sell equity via crowdfunding sites. Beginning in May, that chef could offer equity in the restaurant in exchange for crowdfunded investments. The backers of this crowdfunded campaign, who do not need to meet the accredited investor requirements, would become owners of the restaurant.
Although Title III eases the regulatory burdens on both businesses and investors, there are still several restrictions:
• Businesses may only raise a maximum of $1 million in a 12-month period;
• Individuals with an annual income or net worth that is less than $100,000 may only invest the greater of $2,000 or 5 percent of the lesser of their annual income or net worth in a 12-month period;
• Individuals with an annual income and net worth that is more than $100,000 may only invest 10 percent of the lesser or their annual income or net worth;
• Securities purchased via a crowdfunding transaction generally could not be resold for one year; and
• Businesses must file certain information with the SEC and provide this information to investors, including:
o The price to the public of the securities or the method for determining the
price;
o A discussion of the company’s financial condition;
o Financial statements of the company,
o A description of the business and the use of proceeds from the offering; and
o Information about the officers, directors, and owners of 20 percent or more of
the company.
As you can see, although businesses may now raise investment capital in exchange for equity via crowdfunding sites, there are still specific limitations on these transactions. A business may avoid these requirements by raising investment capital from accredited investors only. Otherwise, a business’s other option is to register with the SEC.
If you have a question about these new regulations or about raising capital, in general, contact a member of MacDonald Illig's Business or Emerging Technology Practice Groups.
The JOBS Act was signed into law in 2012 to increase funding to startups and small businesses and to ease the security regulations that restricted everyday Americans from investing in businesses. Previously, if a business wanted to raise investment capital in exchange for equity in the business, generally, that business had to either register with the Securities and Exchange Commission ("SEC") or only solicit investments from "accredited" investors—individuals that earn more than $200,000 per year or have a net worth of over $1 million. Title III focuses on permitting companies to offer and sell securities to Americans of all financial backgrounds through crowdfunding platforms (the reason why the SEC refers to it as the "Regulation Crowdfunding").
While many businesses have used crowdfunding sites, such as Kickstarter or Indiegogo, to raise capital, these sites operate on a rewards and not an equity basis. For example, a chef soliciting investments via Kickstarter to start a restaurant, could offer a gift certificate or a free meal or a t-shirt of the restaurant in return for an investment, but the chef could not offer equity in the restaurant without registering with the SEC or restricting the crowdfunding to accredited investors. By offering the gift certificate, free meal, or t-shirt, the chef was not selling securities and, thus, did not have to register with the SEC.
Title III enables businesses to more freely sell equity via crowdfunding sites. Beginning in May, that chef could offer equity in the restaurant in exchange for crowdfunded investments. The backers of this crowdfunded campaign, who do not need to meet the accredited investor requirements, would become owners of the restaurant.
Although Title III eases the regulatory burdens on both businesses and investors, there are still several restrictions:
• Businesses may only raise a maximum of $1 million in a 12-month period;
• Individuals with an annual income or net worth that is less than $100,000 may only invest the greater of $2,000 or 5 percent of the lesser of their annual income or net worth in a 12-month period;
• Individuals with an annual income and net worth that is more than $100,000 may only invest 10 percent of the lesser or their annual income or net worth;
• Securities purchased via a crowdfunding transaction generally could not be resold for one year; and
• Businesses must file certain information with the SEC and provide this information to investors, including:
o The price to the public of the securities or the method for determining the
price;
o A discussion of the company’s financial condition;
o Financial statements of the company,
o A description of the business and the use of proceeds from the offering; and
o Information about the officers, directors, and owners of 20 percent or more of
the company.
As you can see, although businesses may now raise investment capital in exchange for equity via crowdfunding sites, there are still specific limitations on these transactions. A business may avoid these requirements by raising investment capital from accredited investors only. Otherwise, a business’s other option is to register with the SEC.
If you have a question about these new regulations or about raising capital, in general, contact a member of MacDonald Illig's Business or Emerging Technology Practice Groups.