On Friday, the SEC approved equity crowdfunding for non-accredited investors in a 3-1 vote. This is the true equity crowdfunding from the JOBS Act of 2012 known as Title III. Given it has been more than three years to get the final rules approved, I wasn’t sure this would ever happen.
The new rules go into effect in 180 days, so there will be time to fully digest them, but here is a primer that may help you decide whether Title III equity crowdfunding is right for you.
The Basics
Before the SEC approved the rules, crowdfunding was allowed when targeted to accredited investors; or in certain states, like Texas, that approved intrastate crowdfunding; or when giving away rewards as opposed to equity in the company. Now, companies can seek funds in exchange for equity from all investors regardless of whether they are accredited.
The Rules
To know whether it makes sense for you, take a look at the rules.
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A company can raise up to $1 million in a 12-month period;
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Individuals can invest up to the greater of $2,000 or the lesser of 5% of the individual’s annual income or net worth;
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If the individual’s income or net worth exceed $100,000, then the investor can provide 10% of the lesser of their annual income or net worth;
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No individual can invest more than $100,000 in crowdfunding platforms during a 12-month period.
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Securities purchased in a crowdfunding transaction generally cannot be resold for one year.
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All sales have to go through a broker-dealer or a funding portal.
The primary hurdle may be the disclosure requirements that companies will have to make. They include:
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The price of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
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A discussion of the company’s financial condition.
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Financial statements which, depending on the amount offered, may include information from the tax returns, reviewed by an independent public accountant, or audited by an independent auditor.
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If a company is raising more than $500,000 but not more than $1 million, a company can provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor.
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A description of the business and the use of proceeds from the offering.
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Information about officers and directors as well as owners of 20 percent or more of the company.
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Certain related-party transactions.
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Annual reports.
To see what exactly these disclosure requirements mean, you have to review the full approved rules available here. Full Title III Crowdfunding Rules. Warning, the pdf is over 600 pages.
Is it right for me?
So, why would a company live with these rules to raise money? In most situations, if you can raise money the old-fashioned way (through accredited investors preferably) or even use debt rather than equity, then we generally recommend you go that route. But, if you are a consumer/retail business, crowdfunding may be the best avenue for expansion. With equity crowdfunding, your customers become vested stakeholders in your business. They become brand ambassadors and referral sources. If you want hundreds of your customers to do that, then consider the crowdfunding route that will be available to you in six months.
