On May 4, 2020, the Securities and Exchange Commission (SEC) announced that it was providing temporary, conditional relief to established small businesses impacted by COVID-19 that will facilitate their ability to pursue offerings under Regulation Crowdfunding. The SEC’s action is intended to expedite the offering process by relaxing certain of Regulation Crowdfunding’s rules with respect to the timing of an offering and the financial statements required. To benefit from the SEC’s temporary rule changes, a small business must meet enhanced eligibility requirements and make a clear disclosure about its reliance on the temporary rules to investors. This relief is available for offerings launched until August 31, 2020.
To be eligible for the temporary relief, issuers must meet all of Regulation Crowdfunding’s existing requirements for participation. They must also (1) have been operating for at least six months prior to beginning the offering, and (2) have complied with the requirements of section 4A(b) of the Securities Act, if the issuer has previously sold securities under Regulation Crowdfunding.
If an issuer meets the enhanced eligibility criteria, the SEC has offered several benefits that are designed to speed up and reduce the barriers to an offering under Regulation Crowdfunding.
- Independent Public Accountant: For issuers offering between $107,000 and not more than $250,000 in a 12-month period, the requirement that financial statements be reviewed by an independent public accountant has been waived and replaced by a certification from the issuer’s principal executive officer.
- Sales are permitted as soon as the issuer has received binding commitments for the total offering amount, rather than requiring the offering to be publically available for at least 21 days.
- Early closings of the offering are permitted under certain additional conditions.
These changes are designed to enable issuers and potential issuers that meet the eligibility criteria to access capital via crowdfunding much more quickly than would otherwise be the case. Easing requirements for accountant-reviewed financial statements may also lower the cost of an offering, which is especially useful as small businesses seek to conserve cash during the COVID-19 crisis.
From the perspective of potential investors, it is important to remember that, while the SEC is requiring issuers to prominently advertise their use of the relaxed regulations, they will be investing with less detail than they would otherwise be required to have. Offerings might also close more quickly, locking in commitments in less time than would otherwise be the case.
This temporary rule by the SEC fits within a broader trend of recent attention with respect to Regulation Crowdfunding. In March 2020, the SEC proposed a range of changes to Regulation Crowdfunding in its largest revision since its initial enactment. The SEC has proposed raising the offering limit from $1.07 million to $5 million, as well as amending the investment limits to remove them entirely for accredited investors and to permit non-accredited investors to invest the greater of their annual income or net worth. These changes suggest a desire by the SEC to make offerings under Regulation Crowdfunding more available and on simpler terms than had been the case under the preexisting regulatory scheme.