On October 30, 2015, the Securities and Exchange Commission (the “SEC”) voted to adopt final rules permitting companies to offer and sell securities through crowdfunding. The new rules, a response to evolving methods of online fundraising for a variety of firms and projects, are meant to assist smaller companies with capital formation and provide additional protections to investors. We previously discussed the proposed crowdfunding rules here; the text of the final rules has not yet been issued, but a copy of the proposed rules is available here.
The final rules, referred to as “Regulation Crowdfunding,” permit a company to raise up to an aggregate of $1 million through crowdfunding offerings in a rolling 12-month period. The rules permit individual investors with both an annual income and net worth equal to or greater than $100,000 to invest, in a rolling 12-month period across all crowdfunding offerings, up to 10 percent of the lesser of their annual income or net worth; provided that no investor may purchase more than $100,000 worth of securities through crowdfunding offerings in a rolling 12-month period. Under the new rules, investors with either an annual income or net worth below $100,000 are limited to investing the greater of $2,000 or 5 percent of the lesser of their annual income or net worth.
The rules exclude certain types of companies (including non-U.S. companies, Exchange Act reporting companies, certain investment companies and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies) from engaging in crowdfunding offerings and place a general one-year restriction on resales of securities purchased in crowdfunding transactions. They also include disclosure requirements for companies participating in such offerings, including financial statements and an annual reporting requirement. In addition, all transactions relying on the new rules would be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Crowdfunding portals will be required to register with the SEC on the new “Form Funding Portal” and become a member of a national securities association (currently, FINRA). The rules regarding such funding platforms reflect their more limited activities than registered broker-dealers, and provide a safe harbor for complying platforms.
The final rules take effect 180 days after they are published in the Federal Register, except that the rules requiring funding platforms to register with the SEC will take effect on January 29, 2016. We will be providing more details regarding Regulation Crowdfunding and the new exemption in a forthcoming client release. Special thanks to Michael Reed and Dan Mandel for this update.