SEC Adopts Crowdfunding Rules to Assist Small Business Access to Capital

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On Friday, October 30, the Securities and Exchange Commission (SEC) adopted final rules that will allow companies to offer and sell securities through crowdfunding. In a release, the SEC said the new rules are designed to assist smaller companies with capital formation and provide investors with additional protections. Title III of the JOBS Act created a federal exemption under the securities laws so that this type of funding method could be used to offer and sell securities.

The final Regulation Crowdfunding rules permit individuals to invest in securities-based crowdfunding transactions subject to certain investment limits. Companies would be allowed to raise up to $1 million in crowdfunding cash per year without registering with the Securities and Exchange Commission, as reported by Forbes. Previously, companies could only seek investments from accredited investors — individuals who own more than $1 million in assets or who have maintained an income of more than $200,000 for at least two years.

John Arensmeyer, founder and CEO of the Small Business Majority, said the decision by the SEC to finalize rules for Title III crowdfunding was a “smart move that promises to provide a much-needed expansion of access to capital opportunities for entrepreneurs.”

The new rules impose disclosure requirements on issuers for certain information about their business and securities offering, as well as create a regulatory framework for the broker-dealers and funding portals that facilitate crowdfunding transactions. Companies that rely on the recommended rules to conduct a crowdfunding offering must file certain information with SEC, including:

  • The price to the public 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;
  • A discussion of the company’s financial condition;
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor;
  • A description of the business and the use of proceeds from the offering;
  • Information about officers and directors as well as owners of 20 percent or more of the company; and
  • Certain related-party transactions.

The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the SEC will be effective January 29, 2016.