The SEC’s equity crowdfunding rules finally go into effect this month almost four years after Congress passed the JOBS Act, requiring the relaxing of certain rules on raising funds. So what does equity crowdfunding actually look like? Here is a primer:
- Non-public US companies may raise funds on the internet from accredited and non-accredited investors alike
- Crowdfunding must be conducted through SEC approved fundraising portals that are manages by registered broker-dealers (i.e., not the company’s own website)
- The amount raised cannot exceed $1,000,000 in a 12 month period
- Individual investors with annual income under $100,000 are limited to investing the greater of $2,000 or 5% of their net worth. Individual investors with annual income of at least $100,000 are limited to investing 10% of their annual income or net worth, whichever is lower, subject to a total limit of $100,000.
- Prior to the start of fundraising, the company must file with the SEC a new Form C, which requires a fairly detailed disclosure of corporate and financial information
- The public filing must include financial statements, which must be certified by a company officer if less than $100,000 is being raised, which must be reviewed by public accountants, if between $100,000 and $500,000 is being raised, and which must be audited if more than $500,000 is being raised
- There are additional annual post-sale public filings required for at least one year
There is no denying that the pool of potential investors is larger with these crowdfunding rules, but the limitations (size of the offering and caps on individual investment), the required use of funding portals, and the regulatory burdens (disclosure, audit and filing requirements) diminish what many thought would really open up fundraising possibilities.
I continue to believe the most effective way to raise real capital for most startups is probably with a standard private placement, including perhaps under the relaxed rules regarding general solicitations (i.e., public advertisements) under Regulation D. This limits (in most cases) the pool of investors to accredited investors, unless the company makes extensive public disclosures, but accredited investors are generally able to write larger checks, and there is no limit on the amount a company can raise.
Using a general solicitation under Regulation D, the company can advertise its fundraising (via website, broadcast or print media) so long as it only sells securities to accredited investors. This would require some work to confirm the investor is accredited, but it doesn’t involve the disclosure and filing requirements of crowdfunding.