Empowering the Collective Wisdom of the Crowd

November 19, 2015


On October 30, 2015, the Securities and Exchange Commission (“SEC”) adopted final rules (“Regulation Crowdfunding”) to permit companies to offer and sell securities through crowdfunding without Securities Act registration.

Crowdfunding is internet-based fundraising that consists of funding a project or venture by seeking small individual contributions from a large number of supporters. It has been around for some time now, but because of the requirements of the federal securities laws, companies have been able to offer only “rewards” such as a free or discounted pre-order of their products, or an exclusive screening of a new film in exchange for pledging funds, but the companies could not offer and sell securities to their supporters unless they could comply with exemptions under existing regulations, including “accredited investors” qualification (those who earn at least $200,000 per year, or have a net worth of at least $1 million).

Regulation Crowdfunding now permits these early supporters to invest in securities using crowdfunding transactions subject to certain investment limits. The new rules cap the amount of money an issuer can raise using the crowdfunding exemption, impose disclosure requirements on issuers, and create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.

Total Investment Amount
The aggregate amount an investor may invest in all crowdfunding offerings during any 12-month period is limited based on his or her annual income or net worth:

  • Individuals with an annual income or net worth of less than $100,000 can invest no more than the greater of (a) $2,000 or (b) 5% of the lesser of his or her (i) annual income or (ii) net worth.
  • Individuals with an annual income or net worth of more than $100,000 can invest 10% of the lesser of his or her annual income or net worth for individuals.

(Note: An investor’s primary residence is not included as an asset in the calculation of net worth.)

Issuer Offering Amount
Under Regulation Crowdfunding, an eligible company is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offering in a 12-month period. A crowdfunded offering will not be integrated with another preceding, concurrent or subsequent exempt offering, provided that each offering complies with the requirements of the exemption that is being relied upon for the particular offering.

Issuer Disclosures
Issuers must file certain information with the SEC on new Form C, and provide this information to investors and the intermediary facilitating the offering. The information includes disclosures of:

  • The price or method for determining price, target offering amount and deadlines;
  • The company’s business and financial condition;
  • The financial statements of the company;
  • The use of proceeds from the offering; and
  • Information about officers and directors as well as owners of 20% or more of the company.
  • In addition, the issuer relying on Regulation Crowdfunding is required to file an annual report with the SEC and provide it to investors.

Required Use of an Intermediary
Regulation Crowdfunding requires that any crowdfunding transactions be conducted exclusively through an intermediary that is registered with the SEC on new Form Funding Portal, and becomes a member of FINRA.

Requirements for Funding Portals
Regulation Crowdfunding requires intermediaries to undertake certain actions, including, but not limited to:

  • Providing investors with educational materials;
  • Taking certain measures to reduce the risk of fraud;
  • Making information that a company is required to disclose available to the public on its platform;
  • Providing communication channels to permit discussions about offerings;
  • Providing disclosure to investors about the compensation the intermediary receives;
  • Accepting an investment commitment from an investor only after the opening of an account;
  • Having a reasonable basis for believing an investor complies with the investment limitations;
  • Providing investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
  • Complying with maintenance and transmission of funds requirements; and
  • Complying with completion, cancellation and reconfirmation of offerings requirements.

In addition, intermediaries are prohibited from engaging in certain activities, such as:

  • Providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;
  • Having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and
  • Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

Only time will tell whether Regulation Crowdfunding’s procedural, informational and compliance requirements will prove to be successful in achieving the dual goal of capital formation and investor protection. Prince Lobel Tye LLP will be closely monitoring developments as market practices emerge for issuers, investors and intermediaries.

If you have any questions about the information presented here, need assistance with reviewing and updating policies, or would like to learn more about how Prince Lobel can address any of your concerns, please contact:  John F. Bradley, at 617 456 8076 or 


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