Crowdfunding Rules Set to Kick In

Crowdfunding sites like Kickstarter have become popular for technology and other business start-ups to raise funding from individuals. The funding has been in the form of donations, typically where the donor receives an item, such as a sample product or other item, in exchange for the donation. But starting May 15, new SEC regulations become effective that permit non-traditional investors to invest in, and not just donate to, start-ups. Members of the general public will be able to an equity ownership or other financial interest in a company through a crowdfunding portal. Companies that utilize the new rules must comply with specified disclosure requirements, and may raise no more than $1 million in investments during a 12-month period. 

The rules also limit the amount an individual may invest, measured over a 12-month period in the aggregate for all crowdfunding investments. Two classes of investors are created for determining the investment limit. Class One investors are those who have an annual income or net worth under $100,000. They may invest the greater of (1) five percent of their income or net worth, whichever is less, or (2) $2,000. Individuals with an annual income and net worth that are each equal to or greater than $100,000 are Class Two investors. They may invest the lesser of (1) ten percent of their annual income or net worth, whichever is less, or (2) $100,000. 

All crowdfunding offerings and investing must be done on line through registered intermediaries, either a funding portal or broker. Intermediaries must keep detailed records of offeror disclosures and transactions. Companies utilizing the new regulations may offer common stock, preferred stock, other equity ownership, or debt. The regulations mandate certain specific types of disclosures, which the intermediary must maintain and make available to prospective investors. These disclosures include: (a) the name of each officer, director, and 20% or greater owner, and number of employees; (b) the issuer’s business plan; (c) description of issuer’s financial condition and selected financial data for previous two years; (d) purpose of the offering and intended use of proceeds; (e) targeted amount to be raised, the expected date to reach that amount, and regular progress reports, as well as the maximum amount that will be accepted; (f) the price of the securities being offered and how the price was established; (g) description of issuer’s ownership and capital structure; and (h) description of risk factors. The issuer may not advertise the crowdfunding offering other than providing notice that direct investors to the portal or broker.