On October 30, 2015, the Securities & Exchange Commission released the long-anticipated final regulations for Equity Crowdfunding, which was a provision of Title III of the 2012 JOBS Act. The passing of these final rules set into motion what could possibly be the largest shift in capital access and investment in the private markets… ever.

These new regulations open up a new point of access to capital for small businesses as well a new (and more efficient) way for the average person to invest in private companies. This article briefly highlights six aspects of equity crowdfunding that every participant needs to understand.

1) It’s A Safe Harbor Rule

The equity crowdfunding rules serve as an exemption that allows for unaccredited investors to invest in private companies without those companies having to comply with traditional, tedious SEC filings.

Equity crowdfunding is actually not a new concept. Equity crowdfunding sites, such as SeedInvest and AngelList, have existed for years but they have only accepted investment dollars from accredited investors. An accredited investor, according to the SEC, is anyone who has an annual of income of at least $200,000 ($300,000 for a married couple) for the past two years and reasonably expects to make that in the current year or anyone who has a net worth of over $1million (not including his/her personal residence).

Traditional SEC safe harbors are predicated on the belief that accredited investors are more financially savvy and better understand the risks of investing in private companies. As such, there are multiple exemptions that already exist for them to invest in private companies. Accredited investments are also better able to absorb the loss of any investment that doesn’t work out.

This new rule adds an additional exemption for unaccredited investors and private companies looking to invest on a wider scale within the private industry. As shown below, the SEC still places certain restrictions on the investments which are meant to protect investors and the integrity of the investing landscape.

2) Important Dates

The final rules for equity crowdfunding were released on October 30, 2015. The rules concerning portal operation and forms for registration became effective today (January 29, 2016). The remaining rules, including the ability for companies to actually start running campaigns on these portals, become effective 180 days from the initial release (i.e. beginning of May 2016).

3) Portal Operations Governed by FINRA

All investments given or received under these provisions must be facilitated through a registered portal. FINRA (Financial Industry Regulatory Authority) is the governing body that will regulate and issue compliance standards for those operating portals. Companies looking to operate an equity crowdfunding portal must submit FINRA Member applications. Today is the first day that companies can submit the forms and applications in order to become a registered portal for hosting campaigns under the Equity Crowdfunding regulations. The final rules were crafted in a way that makes a substantial part of overall compliance the responsibility of the portal operators, as opposed to the businesses seeking investments or the individuals making investments.

4) Required Documentation

Companies looking to host a campaign must provide certain information to portal operators. The following is a quick rundown of the disclosures needed:

  • Information of all officers and individuals/entities owning 20% or more of the company
  • A detailed description of the operations of the business
  • Price of the securities and the method of determining that prices
  • Target offering amount (i.e. how much are you trying to raise)
  • Deadline to reach that amount
  • If the company will accept any excess amounts
  • Statement of the financial condition of the company
  • Financials Reports (income statement, balance sheet, etc.) – companies hosting a campaign for the first time (and companies seeking under $500,000) will not need to have audited financials; they will just need their financial reviewed and prepared by an independent accountant

 5) Funding Limits

As mentioned above, the SEC has placed certain limits on investments that can be received and investments that can be given, mostly done to protect the unaccredited investors.

Companies seeking to raise money can raise up to $1 million in any 12-month period.

Investors having a net worth or annual income that is less than $100,000 are limited to $2,000 a year or 5% of the lesser of their annual income or net worth, whichever is greater. For example, if someone’s net worth is $90,000 and their annual income is $80,000 they would be able to take 5% of the lesser of their annual income or net worth (i.e. 5% of $80,000), which in this case means they can invest $4,000 per year.

Investors having a net worth and annual income greater than $100,000 can invest 10% of the lesser of their annual income or net worth.

6) State vs. Federal Regulations

It’s important for all participants to understand that these regulations represent the federal regulations of equity crowdfunding. However, roughly 47 states have passed intrastate equity crowdfunding rules that regulate equity crowdfunding between businesses and residents positioned solely within that state. Any companies and individuals looking to engage in equity crowdfunding should not only be aware of the federal regulations but should also inquire into any state regulations that may exist.

This is a high level overview of some important details embodied in the SEC equity crowdfunding regulations. There will be more forthcoming articles that will go more in depth with certain provisions of the final rules.

It’s important that you, as a potential participant, are aware the final rules and how to take full advantage of this new opportunity.