The SEC released its long awaited Final Crowdfunding regulations in late 2015. We wrote on this topic in the Summer of 2014, when Wisconsin had adopted crowdfunding rules that governed only the State of Wisconsin. Under those state laws, while Wisconsin businesses could rely on the SEC’s intrastate exemption from filing with the SEC when engaging in crowdfunding, a Wisconsin business wishing to crowdfund could not do so outside of the state. Now, however, the SEC has made its regulations final, allowing small businesses everywhere to crowdfund not only within their individual state, but also outside of their state. The SEC’s rule also overrules Wisconsin’s crowdfunding rules, so that Wisconsin law can no longer be relied on for crowdfunding offerings.
To be eligible for a crowdfunding public offering under the new SEC rules, your business must satisfy a few conditions:
- Your business must be a what is called a “non-reporting company”; that is that your company cannot currently be required to file any financial statements with the Securities and Exchange Commission;
- must be looking to raise less than $1 million over a 12-month period; and
- must be willing and able to ensure that anyone who purchases equity in your company does not sell their stock in the company for more than one year.
All crowdfunding transactions must also be done through an internet portal intermediary that is registered with the SEC (such as gofundme.com). For those of you who are not only interested in crowdfunding for your business but also interested in investing yourself, the SEC’s rules also regulate how much investors can invest in a company depending on the individual’s income and/or net worth. All individual investors must verify their income and net worth through the intermediary site, so the site must have sufficient mechanisms to ensure that investors are honestly stating their income and/or net worth. The limits are as follows:
If an individual has an income or net worth of under $100,000, the individual can only invest a maximum of the greater of $2,000 or 5% of their annual income or net worth.
If an investor’s net worth and annual income is greater than $100,000, then the maximum an individual can invest is 10% of the lower number between the individual’s net worth and their annual income. For taking into account net worth, the value of one’s personal residence in not taken into account. Additionally, during a 12 month period, no individual investor can invest in more than $100,000 of crowdfunding offerings.
Companies must also disclose certain information to the internet portal so that the portal can provide investors with sufficient information for them to make an intelligent investment. A company offering a crowdfunding opportunity must disclose the following:
- The price to the public of securities or the method for determining the price of the securities;
- The target amount your business wishes to raise from the offering;
- A discussion of the company’s financial condition;
- If the offering seeks to raise $100,000 or less, the company is only required to provide a financial statement certified to be true and accurate by the principal officer of the company. If the offering seeks to raise more than $100,000, but not more than $500,000, financial statements must be reviewed by an independent accountant. If the offering seeks to raise more than $500,000, but not more than the $1 million cap, the company’s financial statements must be audited by an independent auditor.
- A description of the business and what the business will use the proceeds for;
- Information about officers and directors, and also owners of 20% or more of the company;
- Certain related-party transactions;
- Companies relying on the crowdfunding exemption are also required to file an annual report with the SEC and provide it to investors.
The crowdfunding exemption offers small businesses an opportunity to raise capital that many small businesses could otherwise not afford due to the complex and costly initial public offering process required by the SEC. However, if your business is interested in crowdfunding, there are still necessary documents and preparation required before you can do so. If you or your business are interested in taking advantage of this new and exciting crowdfunding opportunity, contact Schober Schober & Mitchell, so we can assist you in properly structuring your offering!
[This article is being provided by Jeremy Klang, senior Law Student at Marquette University Law School and Clerk at Schober Schober & Mitchell, S.C.]