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Equity Crowdfunding: It is Finally Available for Small Capital Raises

By Susan J. King, Esq.

The long awaited rules from the U.S. Securities and Exchange Commission on equity crowdfunding for small businesses finally took effect on May 16, 2016. Most non-public U.S. companies can use the new rules to raise up to $1 million in a 12 month period. The amount that any single investor can invest ranges from $2,000 to $100,000, depending on the investor’s annual income and net worth.

Companies using raising funds under the new rules must file an offering statement with the SEC. The offering statement includes:

  • information about the officers, directors and major shareholders;
  • a description of the company’s business and how the funds will be used;
  • the price at which the equity is offered;
  • the target total offering amount and the deadline to reach the target;
  • a discussion of related party transactions;
  • a discussion of the company’s financial condition and financial statements; and
  • other information relevant to the company and the offering

The type of financial statements required depend on the total amount of the offering. For companies seeking to raise $100,000 or less, if the company does not already have audited financial statements the company must provide unaudited financial statements and certain information from the company’s federal income tax returns, each certified by the principal executive officer. For companies seeking to raise more than $100,000, if the company does not already have audited financial statements the company must provide financial statements that have been reviewed by an independent public accountant, but if the company has already sold equity in a crowdfunded offering, audited financial statements are required.

Once the offering process is started, the company can provide information to, communicate with, and accept funds from potential investors ONLY through a third party funding portal. Only a limited announcement of the offering directing potential investors to the third party portal can appear on the company’s website or other direct communications with potential investors.

Any company that raises funds using the crowdfunding exemption from registration is required to file an annual report with the SEC within 120 days after the end of the company’s fiscal year. The report includes information similar to what was in the original offering statement filed with the SEC. Companies that have more than 300 holders of record must continue to file annual reports until:

  • the company has filed at least 3 annual reports if it has assets of less than $10 million;
  • the company is required to file reports under Exchange Act Sections 13(a) or 15(d);
  • the company or another party purchases or repurchases all of the equity issued in the offering; or
  • the company dissolves or liquidates.

The regulations are long and complicated and occupy more than 600 pages of the Federal Register. The SEC’s Small Entity Compliance Guide can help you consider if a crowdfunded offering might be right for your business.

If you would like to learn more about crowdfunding, please contact Caulkins & Bruce, PC.

The information presented here should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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