Equity crowdfunding is rapidly becoming popular among investment firms, venture capitalists, real estate developers, and small to medium sized businesses because crowdfunding is a way to facilitate financing online that is creating a profound shift in the world of investments. Below is a brief overview of the new rules that permit selling securities and debt instruments online.
Regulation D 506(b) & 506(c)
(Unlimited Raise Amounts)
Regulation D provides the most common regulatory exemption used by crowdfunding portals today. It exempts private placement offerings under Rule 506(b) or 506(c), which was adopted on September 23, 2013. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money but can only sell to accredited investors (Reg. D 506b can have a max of 35 unaccredited investors per offering).
(Up to $50 Million)
Regulation A+ exempts a securities offering that does not exceed $20 million from SEC registration if certain requirements are met. However, businesses still must file an offering statement that includes an offering circular and financial statements with SEC, and SEC staff review filings for consistency with applicable rules and accounting standards.
Regulation A+ offers two tiers of offerings: the first tier for offerings of up to $20 million and the second tier for offerings of up to $50 million, each within a 12-month period.
Pros: The new regulation lets Issuers:
- Streamline the government approval process by eliminating state filing requirements and allowing electronic filing
- Increase the funding maximum from $20 million in a 12-month period under original Tier 1 offerings, up to $50 million in a 12-month period (subject to individual investor limitations based on income)
- Permit general solicitation
- Allow Canadian investors to invest
- Offer tradable, non-restricted securities, unlike the other previously discussed regulations
- Preempt state securities laws that regulate the offering inside their borders
- Companies would still face significant pre-sale disclosure, on-going reporting obligations and audited financial requirements
- Excludes asset-back securities
Title III (Regulation Crowdfunding)
($1 Million, requires Funding Portal)
The SEC has issued crowdfunding legislation known as Title III of the JOBS Act. The legislation has three key differentiators 1) provide an easy, low-cost way for startups to raise money online; 2) protect investors from new forms of fraud; and 3) create incentives for financial firms to run crowdfunding websites.
- Companies would be able to reach accredited and non-accredited investors alike (subject to a total investment limit of up to 10% of an investors’ income based on the non-accredited investor’s income and net worth).
Cons: Companies would be restricted to:
- A limited annual raise per issuer
- Must complete pre-sale information on each investment
- Submit audited financials for raises over $500,000.