Crowdfunding Really?
Even though the SEC has stated it is moving forward with its rulemaking obligations under the JOBS Act, it has not informed the public of when it will complete the rules related to crowdfunding. While proponents argue crowdfunding will open the floodgates to capital formation, critics argue the gates opened by crowdfunding will be the floodgates to fraud.
Even though the crowdfunding provisions of the JOBS Act have not yet been approved, many companies are being bombarded with solicitations by boiler room operators offering to help them raise capital using crowdfunding. These groups claim that crowdfunding can be used to sell securities under the JOBS Act despite that it will not be legal until the SEC establishes its new rules.
About Crowdfunding
Crowdfunding establishes an exemption to allow domestic Issuers who do not file reports with the SEC pursuant to Sections 13 or 15(d) of the Securities and Exchange Act of 1934 to raise up to $1 million in any 12-month period. The crowdfunding exemption also provides that:
? Securities sold using crowdfunding transactions will be restricted securities and subject to a one-year holding period unless registered with the SEC.
? An investor with a net income of $100,000 or more will be permitted to invest the greater of 10% of his annual income over a 12-month period or 10% of his net worth. Investors with a net income of less than $100,000 may invest the greater of $2,000 or 5% of annual income or net worth.
? Provides that only registered broker-dealers or registered "funding portals may offer and sell securities offered in Crowdfunding offerings. Broker-dealers and funding portals may not solicit investments, offer investment advice or pay transaction based compensation to employees.
? The issuer must file a disclosure document with the SEC at least 21 days prior to its first crowdfunding sale. For offerings over $500,000 must be accompanied by audited financial statements.
? Does not allow advertising except by the registered broker or funding portal cannot be directed at potential investors.
? Requires companies that use crowdfunding to raise capital must file annual reports with the SEC.
? Broker dealers and funding portals obtain extensive background checks on management and large stockholders is required. Due diligence on the company itself is required as well.
Crowdfunding Drawbacks
Compliance with the crowdfunding exemption may be difficult for small and startup companies because the JOBS Act's disclosure requirements stipulate the inclusion of financial statements reviewed by an independent public accountant for any offering over $100,000 but under $500,000. For companies raising $500,000 or more, the JOBS Act requires audited financial statements must be provided to potential investors. Both the offering procedures as well as the disclosure obligations are necessary for the exemption to be available. As such, all offering materials should be thoroughly reviewed by a securities attorney to ensure compliance.
Even though the crowdfunding provisions of the JOBS Act have not yet been approved, many companies are being bombarded with solicitations by boiler room operators offering to help them raise capital using crowdfunding. These groups claim that crowdfunding can be used to sell securities under the JOBS Act despite that it will not be legal until the SEC establishes its new rules.
About Crowdfunding
Crowdfunding establishes an exemption to allow domestic Issuers who do not file reports with the SEC pursuant to Sections 13 or 15(d) of the Securities and Exchange Act of 1934 to raise up to $1 million in any 12-month period. The crowdfunding exemption also provides that:
? Securities sold using crowdfunding transactions will be restricted securities and subject to a one-year holding period unless registered with the SEC.
? An investor with a net income of $100,000 or more will be permitted to invest the greater of 10% of his annual income over a 12-month period or 10% of his net worth. Investors with a net income of less than $100,000 may invest the greater of $2,000 or 5% of annual income or net worth.
? Provides that only registered broker-dealers or registered "funding portals may offer and sell securities offered in Crowdfunding offerings. Broker-dealers and funding portals may not solicit investments, offer investment advice or pay transaction based compensation to employees.
? The issuer must file a disclosure document with the SEC at least 21 days prior to its first crowdfunding sale. For offerings over $500,000 must be accompanied by audited financial statements.
? Does not allow advertising except by the registered broker or funding portal cannot be directed at potential investors.
? Requires companies that use crowdfunding to raise capital must file annual reports with the SEC.
? Broker dealers and funding portals obtain extensive background checks on management and large stockholders is required. Due diligence on the company itself is required as well.
Crowdfunding Drawbacks
Compliance with the crowdfunding exemption may be difficult for small and startup companies because the JOBS Act's disclosure requirements stipulate the inclusion of financial statements reviewed by an independent public accountant for any offering over $100,000 but under $500,000. For companies raising $500,000 or more, the JOBS Act requires audited financial statements must be provided to potential investors. Both the offering procedures as well as the disclosure obligations are necessary for the exemption to be available. As such, all offering materials should be thoroughly reviewed by a securities attorney to ensure compliance.