New Rules on Equity Crowdfunding Pose Opportunities and Challenges for Emerging Companies

The Securities and Exchange Commission (SEC) recently adopted final rules permitting general equity crowdfunding under Title III of the JOBS Act, creating new opportunities for capital raising for emerging businesses. However, the effectiveness of these rules remains uncertain, and it is unclear which types of companies will benefit the most from the new regulations. The rules, which become effective 180 days after Federal Register publication, will allow companies to raise up to $1 million in any 12-month period from ordinary investors, subject to certain investment limitations based on income and an overall cap of $100,000 of crowdfunded investments in any 12-month period.

Key Takeaways:

• The new rules permit general equity crowdfunding under Title III of the JOBS Act, allowing emerging businesses to seek equity capital from ordinary investors.
• Companies will be able to raise up to $1 million in any 12-month period, subject to income-based investment limitations and an overall cap of $100,000 of crowdfunded investments.
• Intermediaries, registered as broker-dealers or funding portals, will bear substantial responsibility in presenting information about an offering and reducing the risk of fraud in crowdfunded offerings.
• Securities sold in a crowdfunded offering will be transfer-restricted for one year and exempt from the Exchange Act 12(g) threshold under certain conditions.
• Companies with highly technical businesses or those requiring continuous capital infusions may not benefit from crowd investors, according to the SEC.
• Companies will have to provide outside, reviewed financials for offerings over $500,000 and up to $1,000,000, and can use an optional Q&A format in preparing and disclosing business information to investors.
• The new rules provide a more cost-effective method for emerging companies to seek capital compared to traditional private placements and public offerings.

Statistics:

• The new rules allow companies to raise up to $1 million in any 12-month period from ordinary investors.
• Individual investors are subject to certain investment limitations based on income: $2000 or 5% of the lesser of their annual income or net worth, but not to exceed $100,000 if both are over $100,000.
• The overall cap on crowdfunded investments is $100,000 in any 12-month period.
• Securities sold in a crowdfunded offering will be transfer-restricted for one year.
• Companies may raise up to $25 million in assets, subject to certain conditions, including retaining a registered transfer agent.

Sources:

• Raines Feldman LLP
• Securities and Exchange Commission (SEC)