What is crowdfunding?
Equity crowdfunding is a way for a company to raise funds by selling equity securities via the internet to raise money for the company.
Why is it crazy?
Crazy because crowdfunding platforms have raised billions and the number of crowdfunding sites and companies using crowdfunding is growing exponentially.
Crazy because it has disrupted the way capital has historically been raised.
And now it will get even crazier.
On October 30, 2015, the Securities and Exchange Commission ("SEC") adopted final rules to permit companies to offer and sell securities through crowdfunding without registration of the securities. With the issuance of these rules "Regulation Crowdfunding" the SEC has finally completed all the major rulemaking under the JOBS Act passed in April 2012. Title III of the JOBS Act created an issuer exemption from registration for equity crowdfunding but use of Title III has remained in limbo for the last three and a half years while waiting for the rules. The exemption from registration for equity crowdfunding will now be available in 180 days after the new rules are published in the Federal Register and non-accredited investors can finally participate in crowdfunding.
The new rules permit individuals—non-accredited investors—to invest in equity crowdfunding transactions subject to certain limits, limit the amount of money issuers can raise, impose disclosure requirements on issuers and create a regulatory framework for broker-dealers and funding portals.
Summary of Some of the New Rules:
Companies will be able to raise a maximum of $1 million during a 12-month period.
Permits non-accredited investors to invest:
If annual income or net worth is less than $100,000, the investment is limited to greater of $2,000 or 5% of lesser of investor's annual income or net worth;
If both annual income and net worth are equal to or greater than $100,000, the individual investor's investment is limited to 10% of lesser of annual income or net worth.
During 12-month period no more than $100,000 of securities can be sold to such investor through all crowdfunding offerings.
Non-US companies, such as Swiss companies, will not be able to use the issuer exemption from registration; which can be cured by the non-US company incorporating in the US.
In general the securities purchased cannot be re-sold for one year.
All such transactions will have to take place through a SEC-registered broker dealer or a funding portal—a new type of SEC registrant—and the funding portal will need to become a member of FINRA--Financial Industry Regulatory Authority.
Non-US funding portals, for example, Swiss-based portals, are permitted; however, they are subject to additional requirements including appointing an agent for service of process in the US and opinion of counsel relating to access to books and records and onsite SEC and FINRA inspection and examination.
For further details about the new rules and the SEC press release click here.
About the author:
|Karen A. Monroe is an international business lawyer whose focus is in the areas of international securities, contracts, corporate and related intellectual property law with an emphasis on cross-border transactions between Switzerland, Europe, and the United States. She works out of the firm's Geneva office and can be reached at: 41 22 322 2010 or via email at: firstname.lastname@example.org|