In the past 20 years Crowdfunding—an internet-based form of raising small amounts of money from a large number of people to fund a project or venture—has evolved into a viable financial tool, especially for startups and nonprofits.
The total amount of money raised via crowdfunding in the United States in 2016 was reported to be $738.9 million. And worldwide crowdfunding surpassed venture capital investment for the first time in 2016.
The World Bank estimates global investment through crowdfunding will reach $93 billion by 2025.
In the United States, under the Securities Act of 1933, the offer and sale of securities must be registered—unless an exemption from registration is granted.
Regulation Crowdfunding refers to a specific exemption contained in the JOBS Act of 2012 (Jumpstart Our Business Startups).
As you probably guessed, the government has stringent rules and regulations. Here’s a quick overview of the requirements that must be met to qualify for the Regulation Crowdfunding exemption:
- Maximum offering amount of $1,070,000 in a 12-month period
- Investors are subject to limits based on annual income and net worth criteria
- Transactions must be conducted through a single intermediary platform that is managed by a broker-dealer or a portal that is registered with the SEC and FINRA.
- Companies not eligible to use the Regulation Crowdfunding exemption, include:
- non-U.S. companies
- companies that already are Exchange Act reporting companies
- certain investment companies
- companies that are disqualified under Regulation Crowdfunding’s disqualification rules
- companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement
- companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies
Any issuer conducting a Regulation Crowdfunding offering must electronically file its offering statement—along with the facilitating intermediary –through the Commission’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The required disclosure information includes:
- Information about officers, directors, and owners of 20 percent or more of the issuer
- A description of the issuer’s business and the use of proceeds from the offering
- The price to the public of the securities (or the method for determining the price)
- The target offering amount and the deadline to reach the target offering amount
- A discussion of the issuer’s financial condition and financial statements
The financial statements requirements are based on the amount offered:
- Offers of $107,000 or less
- Financial statements of the issuer and certain information from the issuer’s federal income tax returns, both certified by the principal executive officer.
- Or, financial statements of the issuer that have either been reviewed or audited by a public accountant that is independent of the issuer (no need to include federal tax return information or certification by principal executive officer
- Offers greater than $107,000 but less than $535,000
- Financial statements audited by a public accountant that is independent of the issuer
- Offers greater than $535,000
- For first-time Regulation Crowdfunding issuers—Financial statements reviewed by a public accountant that is independent of the issuer or financial statements audited by an independent auditor
- For issuers that have previously sold Regulation Crowdfunding securities—Financial statements audited by a public accountant that is independent of the issuer
An issuer must provide an update on its progress toward meeting the target offering amount within 5 business days after reaching 50% and within five days after reaching 100% of its target offering amount.
Any issuer selling securities in a Regulation Crowdfunding offering is required to provide an annual report no later than 120 days after the end of its fiscal year. The report must be filed on EDGAR and posted on the issuer’s website.
Limits on Advertising and Promotions
An issuer may only advertise the terms of a Regulation Crowdfunding offering in a notice that directs potential investors to the intermediary’s platform.
Additional regulations deal with resale restrictions and “bad actor” disqualifications, as well as a few other do’s and don’ts.
As detailed above, utilizing Regulation Crowdfunding requires adhering to the government’s very strict directions. The upside, though, is crowdfunding is proven to be a viable way to fund a venture.
An experienced CPA can assist you in complying with the mandated requirements.