This is the second of our blog posts exploring Regulation Crowdfunding and its provisions before the final rules become effective on May 16, 2016.

Issuer Requirements

Certain Issuers Ineligible for Crowdfunding

Certain companies will not be eligible to take advantage of Regulation Crowdfunding. Ineligible companies include non-US companies, companies that are already reporting under the Securities Exchange Act of 1934, certain investment companies, companies that are subject to disqualification under the final rules (similar to “bad actor” disqualifications recently implemented by the SEC under Rule 506), companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding (discussed further below) during the two years immediately preceding the filing of the offering, and shell 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 entity.¹

Initial Issuer Disclosure Requirements

Issuers who want to rely on Regulation Crowdfunding will be required to file Form C electronically through the SEC’s EDGAR system prior to commencement of the offering,² which must include, among other items:

• Its name, legal status, physical address and website address;
• The names of its directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20% of its voting equity;
• A description of its business, anticipated business plan and current number of employees;
• The target offering amount, the deadline to reach the target offering amount and whether it will accept investments in excess of the target amount;
• The purpose and intended use of the proceeds of the offering;
• The price to the public of the securities or the method for determining the price;
• The name and certain file numbers of the intermediary through which the offering is being conducted;
• The amount of compensation to be paid to the intermediary and any direct or indirect interest the intermediary has in the issuer;
• A discussion of the issuer’s financial condition, including a discussion on the material factors that make an investment in the issuer speculative or risky;
• A description of the material terms of any indebtedness of the issuer;
• A description of any registration-exempt offerings conducted by the issuer within the preceding three years; and
• A description of certain related-party transactions.³

In addition to the above, the issuer will have to provide annual financial statements under US GAAP (including each of a balance sheet, income statement, statement of cash flows, statement of stockholders equity and notes to the financial statements) covering the shorter of the two most recently completed fiscal years of the issuer, or the period since inception of the business. Such annual financial statements must be certified, reviewed or audited, depending on the amount of crowdfunding securities offered and sold by the issuer during a 12-month period as follows:

• For offerings of $100,000 or less, financial statements certified as true and complete in all material respects by the principal executive officer;
• For offerings of more than $100,000 but less than $500,000, financial statements reviewed, but not audited, by an independent public accountant; and
• For offerings of more than $500,000 (but less than the $1,000,000 aggregate cap):
  • If the offering is the issuer’s first offering under Regulation Crowdfunding, financial statements reviewed, but not audited, by an independent public accountant; or
  • If the offering is not the issuer’s first offering under Regulation Crowdfunding, financial statements audited by an independent public accountant,

provided, however, that in any of the foregoing, if the issuer has reviewed or audited financial statements available, the issuer must provide those notwithstanding any lesser applicable option above.⁴

Material Changes and Progress Updates

Issuers will be required to file reports through the SEC’s EDGAR system disclosing material changes, additions or updates to information that it provides to investors for any offering that has not yet been completed or terminated. What constitutes a material change, addition or update will be a facts-and-circumstances analysis. There is no specified filing deadline for reporting material changes, additions or updates. Instead, following any such reports, investors must reconfirm their investment commitment within five business days or have their orders automatically canceled.⁵

Moreover, Regulation Crowdfunding will require issuers to provide progress updates about the issuer’s progress toward meeting target offering amounts no later than five business days after the dates that an issuer reaches 50 and 100 percent of the target offering amount. If an issuer will accept proceeds in excess of the target offering amount, the issuer also would be required to provide a final progress update, no later than five business days after the offering deadline, disclosing the total amount of securities sold in the offering. The progress report updates may be satisfied if the relevant intermediary for the offering makes the progress updates publicly available on its platform. However, if the intermediary does not provide such an update, the issuer will be required to file the progress updates itself through the SEC’s EDGAR system. In addition, an issuer relying on the intermediary’s reports of progress must still file a final report through the SEC’s EDGAR system at the end of the offering to disclose the total amount of securities sold in the offering.⁶

Ongoing Annual Report Requirements

Issuers who want to utilize Regulation Crowdfunding also will be required to file (and post on their websites) annual reports covering most of the original information on Form C disclosed above, updated in all respects as applicable, by no later than 120 days after the end of each fiscal year.⁷ The primary difference between an annual report and the initial information provided is that the financial statements included for the most recent fiscal year with an annual report need only be certified by the principal executive officer of the issuer to be true and correct in all material respects (unless reviewed or audited financial statements are otherwise already available).  

Issuers who have utilized Regulation Crowdfunding will be required to continue to file (and post on their websites) annual reports each year until they become public, repurchase all securities issued pursuant to the crowdfunding exemption, or liquidate or dissolve.  Moreover, certain smaller issuers are provided other instances in which they will no longer have to provide annual reports:

• The issuer has filed at least one other annual report, and has fewer than 300 holders of record; or
• The issuer has filed at least three annual reports and has total assets that do not exceed $10,000,000.⁸

¹ See id. at 34-40

² Regulation Crowdfunding does not formally define the “commencement” of an offering.  However, the SEC has interpreted the term “offer” broadly in the past, explaining that “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer…” Id. at 142, quoting from Securities Offering Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] at 44731. 

³ See id. at 40-114.

⁴ See id.

⁵ See id. at 112-15; 564-65.

⁶ See id. at 109-12; 564-65.

⁷ See id. at 428.

⁸ See id. at 430.