Equity crowdfunding promises to open up a new financing source for thousands of capital starved businesses around the country. Many entrepreneurs are wondering what this means for them and don’t have time to digest the complex 585 page rule proposal.
For those entrepreneurs without large amounts of spare time or excess legal budgets, here is a quick list of items that you should be aware of now:
1) It’s not legal yet. The rules can still change. The proposed rules were released on October 23, 2013 and are currently in a 90 day comment period. The absolutely earliest that equity crowdfunding in the US could become legal is in the Spring of 2014, but more likely it will be Fall or Winter 2014.
2) Up to $1,000,000 in Financing. Private companies may soon be able to raise up to $1M in a 12 month period from an unlimited number of investors in small amounts (as low as $50 or $100 each).
3) Individual Investor Limits. Each investor will have a cap on the amount they can crowdfund in a year, generally between $2,000 – $5,000 for those with income and net worth below $100,000.
4) Investor Self-Certification. Unlike Rule 506(c) of Reg D, Investors will be able to self-certify their income, net worth and previous crowdfunding investments. So no worrying about checking investor tax returns or brokerage statements.
5) Everyone can participate. No longer will early access to the next Facebook or Instagram be limited to the 1%. Unaccredited investors will be able to participate in your financing up to the individual investment limits.
6) Simultaneous Reg D Offerings. You will be able to run simultaneous Reg D and crowdfunding offerings. This means that you can do a standard offering with accredited investors and use the crowdfunding offering solely for unaccredited investors.
7) Limited Advertising. You will be able to broadly distribute notices (a “Notice”) announcing your offering and including how much you are raising and directing people to your online platform. All other communications about your offering (i.e. about how great your company is) must take place on the internet platform for everyone to see.
8) Communications Disclosure. All communications by the company or anyone being compensated by the Company about the offering must include a disclosure about the relationship or compensation being paid. Companies may pay third parties to promote the offering on the platform (or with a compliant Notice) with proper disclosure.
9) Internet Funding Portal Required. All crowdfunding offerings must be conducted via an internet platform and all communications will be publicly viewable on the platform.
10) Cap Table Issues / No Shareholder Limit. You may end up with hundreds or thousands of shareholders on your cap table. While crowdfunded securities will not count towards your 2,000 shareholder limit, this can be scary for future investors. Unfortunately, the JOBS Act does not allow traditional holding companies, but other solutions are in the works.
11) Secondary Market. The regulations leaves the door open for the development of a secondary market in crowdfunded securities. We suspect, however, that many companies will include transfer restrictions in the terms of their crowdfunding offerings.
12) It might be too expensive and time consuming. The regulations have substantial compliance requirements, including preparing financial statements and disclosure documents as well as ongoing reporting requirements. Effectively, you will become a mini public company and will need to make an initial disclosure and ongoing filings with the SEC, which can be very costly and can expose founders to additional liability. Hopefully, the regulations will be revised to reduce these burdens.
13) Personal Liability Concerns. Your company, and its directors and officers personally, will be liable for any material misstatements in your offering documents. As an added concern, the burden of proof will lie with you to prove that you could not have known about such material misstatement. Make sure your D&O insurance is up to date!
14) Speak Up! The SEC is listening. Think crowdfunding will be too expensive or risky? Tell them what you think by leaving a comment.
15) State Crowdfunding Provisions. Some states have active intrastate crowdfunding provisions. These are generally far less onerous than the federal rules. Check out the Invest Georgia Exemption. Kansas and Wisconsin have also implemented regimes and many others have them under consideration. If you are in one of these states, it may make sense to take a hard look at these rules.
Equity crowdfunding has so much promise, but many details remain to be worked out. For a detailed review and ongoing coverage of the equity crowdfunding rules, check out our 9-page Regulation Crowdfunding Outline, follow us at @seedinvest_co and keep an eye on www.seedinvest.com/blog.
This is only a summary of the proposed rules, and is intended for general information only. These are only the proposed rules; the final rules may differ materially from what is summarized here. The information herein is not a substitute for professional legal advice and is intended to facilitate discussion with legal counsel. Nothing herein shall create an attorney-client relationship, nor is it a solicitation to offer legal advice. If you ignore this warning and convey confidential information in a private message or comment, there is no duty to keep that information confidential or forego representation adverse to your interests. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your rights.