The JOBS Act of 2012 directed the SEC to create rules facilitating equity crowdfunding by small businesses. Essentially, this allows companies to raise capital from a large number of investors without having to conform to stringent rules applied to companies that go public through an initial public offering (IPO). Two years ago, the SEC finalized rules that allowed “accredited investors” to invest through equity crowdfunding. On March 24, 2015, the SEC finalized rules for two types of offerings that effectively now allow “non-accredited investors” to participate in equity crowdfunding. Understanding these rules can help you determine whether equity crowdfunding makes sense for your business when you need capital.
General rules for equity crowdfunding
Businesses can raise up to $50 million in capital from investors within a 12-month period. The final rules (referred to as Regulation A-plus) provide for two tiers of offerings:
- Tier 1: offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.
- Tier 2: offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Tier 2 offerings are exempt from state blue sky laws, meaning there is no requirement to register in each state in which securities are offered.
Both tiers are subject to certain basic requirements; Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements (audited financial statements; annual, semiannual, and current event reports; and a limit on the amount that non-accredited investors can purchase).
Businesses can advertise their capital requirements, but the crowdfunding itself must be done only through SEC-approved platforms. EquityNet is the only patented site and it was helpful in providing some information for this article. Other platforms include:
The latest SEC rule is effective on May 24, 2015.
Rules for accredited investors
Final rules under Title II of the Act, which were adopted in September 2013, allowed companies to raise money through equity crowdfunding from accredited investors. It was reported that $250 million was raised in the first year. An accredited investor is a person with annual income over $200,000 or a net worth (exclusive of a personal residence) over $1 million.
Rules for non-accredited investors
Final rules under Title III of the Act now allow a non-accredited investor (someone who does not meet the definition of an accredited investor) to participate in equity crowdfunding. A non-accredited investor cannot invest more than 10% of their income or net worth (without regard to a personal residence) each year.
Is crowdfunding for you?
This is a complicated question with no simple answer. Consider some factors:
- Sharing information (including financial information) with investors
- Choosing the best platform
Conclusion
Whether investors will flock to the opportunity to crowdfund in exchange for an equity interest in a company remains to be seen. Investors may harbor a healthy skepticism about the legitimacy of the companies raising funds as well as concerns about liquidity. Companies raising modest sums may prefer older crowdfunding options, such as donations or loans. It’s certainly a brave new capital-raising world.
