Crowdfunding is not new to businesses. You have likely seen or participated in campaigns to help companies bring their idea to market or to grow their business. In return for a small investment, you receive a product, gift or service in exchange. This is known as rewards-based crowdfunding, which began to become a viable avenue for raising funds for businesses in 2009 with the launch of a number of crowdfunding platforms like Kickstarter and Indiegogo.
With new rules from the SEC, crowdfunding is now getting an upgrade. Equity crowdfunding allows a business to seek capital from a diverse group of investors through a “funding portal” and provides investors with an equity stake or stock in the business. Crowdfunding transactions are exempt from the complex and expensive securities registration process. These transactions could be a simpler equity financing option for small businesses; however, the total costs that small firms will incur from a crowdfunding offering are still unclear.
The Securities and Exchange Commission (SEC), who oversees the process, issued a long-awaited final rule on equity crowdfunding that will be effective January 29, 2016. Highlights of the new requirement include:
- Small businesses can raise up to $1 million in a twelve-month period and must disclose:
- Financial statements
- How the proceeds from the offering will be used
- Corporate officers and directors
- Limits the amount an investor can spend to:
- Greater of $2,000 or 5% of their annual income or net worth (whichever is less) if both are below $100,000
- 10% of their annual income or net worth (whichever is less) if both are equal to or more than $100,000
- A total of $100,000 aggregate investments during a 12-month period
- Requires funding portals to register with the Financial Industry Regulatory authority (FINRA) and:
- Provide educational materials on how the funding portal operates
- Disclose how the portal is compensated
- Provide disclosures from the offering business
WIPP has been a strong advocate for finalized crowdfunding rules, having included the priority in the recently issued Access to Capital Platform. The SEC’s rule will allow small businesses to raise capital through investment without triggering federal securities laws and registration requirements.
For more information, please see SEC Chair Mary Jo White’s statement on Crowdfunding regulation.