November 10, 2015

A Snapshot of New SEC Crowdfunding Rules

At the end of October 2015, the Securities and Exchange Commission finally passed new federal crowdfunding rules. Crowdfunders will have to wait until April 2016, when the new rules "go live," to raise funds. Here are four key takeaways from the new rules:

1. VCs Aren’t Trembling

In 2014, venture capital seed rounds averaged $4 million and composed only 1 percent of the dollar value of all venture capital investment. With the SEC capping crowdfund campaigns at $1 million in a 12-month period, don’t expect massive disruption in the VC industry.

But with the popularity of crowdfunding in non-equity areas — such as KickStarter, Go Fund Me and Kiva — and the untapped demand for private placement investments from the general population, a robust small-denomination market for non-public securities (publicly traded companies are not permitted to crowdfund) will certainly develop.

2. Funding Portals Will Sprout

Companies must use a third-party "funding portal" to communicate with investors. Through these portals, the company sets a target offering amount and a campaign deadline and discloses to investors certain company information (such as risk factors, business plans and financial statements). Portals are already sprouting like mushrooms; expect some to develop into sophisticated marketplaces.

3. Audits Not Required (Sort of)

Audits are only required on campaigns greater than $500,000 where the company is not engaged in its first crowdfund campaign. So, for a large, first-time campaign and for campaigns from $100,000 to $500,000, the company’s financial statements must be only "reviewed" by an independent auditor. For offerings of $100,000 or less, financial statements simply must be certified by the company’s CEO.

4. Investor Limits

Individuals will be allowed to invest based on annual income or net worth:

  1. If annual income or net worth is less than $100,000, investment limit is the greater of $2,000 or 5 percent of the lesser of annual income or net worth.
  2. If annual income or net worth is $100,000 or more, investment limit is 10 percent of the lesser of annual income or net worth.

Investors will be limited to making $100,000 per annum aggregate in crowdfunding offerings and will be required to hold the securities for a least one year. It remains to be seen what secondary market will develop, if any, for companies that never list on the public exchanges.

A more in-depth discussion of this topic is available here. The full 685-page rule is available here.

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