CROWDFUNDING
Perry Douglas West, Esq
“Crowdfunding” is essentially raising small amounts of money from a large number of people.
Crowdfunding appeared in the 1700’s as loan funds created by donations from wealthy citizens that provided loans to poor but creditworthy people. They have continued through modern day “micro funding” or peer to peer micro loans in the US and various other countries through such companies as Prosper and other peer-to-peer lending sites.
Most people think of modern day crowdfunding as beginning in the later 1990’s when a British band with no other source of money, funded it music tour through multiple small donations. It became a resource for funding in the music business with contributors sometimes receiving a CD of the music produced from the contributions. Because of the law, fundraisers could not sell equity in their project for cash but could reward funders through sharing in the creation with a copy of the music or other product created by the funds raised to create the product. Its popularity led to the creation of numerous internet based crowdfunding platforms such as Kickstarter and IndieGoGo.
The growth of these platforms in the US and certain other jurisdictions continued to be limited by the regulatory scheme of federal and state securities laws which prevented or limited the widespread sale of unregistered equity securities to investors in order to raise cash.
In 2012, the US Congress passed the JOBs Act otherwise known as the “crowdfunding bill” and while this bill did remove the ban on general solicitation of investors for some unregistered securities, it did so in a very narrow category of investments with most investments essentially remaining subject to limitations previously in place on the sale of unregistered securities. Specifically, the removal of the general solicitation restriction was on placements under Rule 506(c) however with the additional restriction that the issue be limited to accredited investors only and that investors have their status verified by an independent third party professional (broker, CPA, etc). This general solicitation rule provided additional interest for registered broker dealers to market restricted securities under these rules. At this point however, it was still far removed from the original idea of “crowd funding”.
Then, in a significant series of amendments, referred to as “Crowdfunding exemption and requirements”, the U.S. Securities and Exchange Commission moved a long way toward the original concept of crowdfunding. Under these amendments a crowdfunding would include among other provisions, the following:
- The issuer now has the ability to raise up to $5,000,000 over a 12 month period using the crowdfunding provisions.
- Accredited Investors have no limit on the size of the investment they may make within the offering.
- Non-accredited Investors are limited in the size of their investment, to an amount equal to the greater of their annual income or their net worth.
- Crowdfunding offerings may only be conducted through a registered funding portal and member of FINRA (Financial Industry Regulatory Authority). Most all communications involving an offering have to be conducted through the registered funding portal over which the crowdfunded offering is made. The issuer is permitted to use only one portal for its crowd offering.
- After the issuer has entered into an agreement with a registered funding portal, its Crowd Offering pursuant to Regulation CF is initiated by the filing of a Form C with the US Securities and Exchange Commission.
- After the offering, the issuer must continue to provide current information in the form of an annual report using the same Form C format used in the initial filing, along with either a financial statement certified by a principal executive officer of the company, or a financial statement reviewed or audited by an independent certified public accountant.
Importantly, a Regulation CF exempt offering cannot be used by: 1) a non US Company, 2) a company filing reports pursuant to Rule 13 or 15(d), referred to as “reporting companies” 3) a company formed under the Investment Company Act, 4) Although initially it could not be used by a company with no business plan, some subsequent amendments seem to provide for its use with Special Purpose Acquisition Companies (SPAC’s).
Although there is this continued regulatory framework required with Crowd Offerings, the new rules open up access to a significant portion of the investing public to small issuers which because of the restrictions on private placements would not have had without resorting to the overly burdensome and expensive public registration process.
Perry Douglas West Chartered
www.perrydouglaswest.com
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