On November 2, 2020 the Securities and Exchange Commission voted to amend rules in order to simplify and improve the complex regulations to the Crowdfunding Regulations under the JOBS Act. Here is what you need to know.
What is Crowdfunding?
Crowdfunding is a method of raising capital through the collective effort of friends, family, customers and individual investors. This approach to raising capital taps into the collective efforts of a large pool of individuals, primarily online via social media and crowdfunding platforms, and leverages their networks for greater reach and exposure.
This approach contradicts the traditional approach to financing a business which involves drafting a business plan, market research, prototypes, and then shopping your idea around to a limited pool of wealthy individuals or institutions. The crowdfunding approach dramatically streamlines the traditional approach, which would require months of sorting through your personal network, vetting investors, and spending your own time and money to get in front of them.
Major Updates to Crowdfunding in 2021
- Raise in Aggregate Offer Limit: Companies raising money through regulation crowdfunding can now raise up to $5million, which previously had a limit of $1.07 million. This will open significant opportunities for businesses to use capital to recover from the current economic crisis due to the pandemic or to launch innovative new products and services. Entrepreneurs can now raise up to $5 million without having to register the transaction with the SEC.
- Removal of Individual Investor Limits for Accredited Investors: Previously, accredited investors previously had to meet certain income and wealth requirements. The SEC removed the investment limits in regulation crowdfunding for high net worth individual entities that qualify as accredited investors. For investors who do not qualify as accredited investors, they can rely on the greater of their income or net worth in calculating their investment limit and remove the $107,000 cap on individual’s crowdfunding investments during a 12-month period. This expands the investor pool to other individuals who may not meet the income and wealth requirements, but have other proof of financial sophistication.
- Potential Investors Allowed to Gauge Interest: This amendment is beneficial for less experienced entrepreneurs unaccustomed to securities law’s confusing array of rules on what they can say and when. Allowing solicitation prior to filing would enable issuers to determine market interest in their securities before incurring the costs of preparing and filing an offering statement. The amendment will likely reduce the risk of a failed offering and the associated costs.
- Approval of Special Purpose Vehicles: Previously, Regulation Crowdfunding required investors purchasing securities in an offering to hold the securities in their own name, creating administrative complexities. The SEC adopted certain amendments to allow investors who are neutral persons to invest though a crowdfunding vehicle, which would constitute a single record holder in the company’s capitalization table.
- Relief from Financial-Statement Requirements: An issuer conducting a crowdfunding offering is required to include certified, reviewed or audited financial statements in its Form C filed with the SEC. The temporary rule provides an exemption from certain financial statement review requirements for issuers offering $250,000 or less of securities in reliance of on the exemption within a 12-month period.
Who Is Eligible to Benefit from the New Rules?
Companies must meet Regulation Crowdfunding’s existing eligibility requirements plus an issuer must have been organized and have had operations for no less than six months prior to the commencement of the offering. Additionally an issuer must not have aa history of non-compliance with Regulation Crowdfunding offering requirements.
The Bottom Line
These developments are welcomed news for early stage companies. Not only will the amount of capital that can be raised under Reg CF increase significantly, but investors interest is likely to be greater because of the increased investment limits. Additionally, the ability to test the waters allows companies to better evaluate opportunity for investor interest before incurring large costs of a Reg CF offering.
Crowdfunding Experts at Exemplar Companies
You Can’t Do it Alone. What you need is an experienced team to help take your idea or business to the next level. Exemplar Companies has a team of professionals across accounting, law and marketing to assist entrepreneurs in crowdfunding efforts. Contact us today to get started.
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