In the context of financing, is the process of getting funding, usually online, for a project from a large number (or crowd) of people who typically each contribute small dollar amounts. With crowdfunding platforms such as Kickstarter, the entrepreneur will set a target for the dollar amount to be raised, the deadline by which it must be raised and any reward to the persons contributing to the project. Typically, the dollar amount to be raised must reach the targeted amount on or prior to the deadline or all funds raised must be returned to the people who contributed to the project. As noted, contributors in this type of
In securities-based crowdfunding, on the other hand, those who contribute funds receive equity or another security in
Regulation Crowdfunding permits the offer and sale of debt and/or equity securities through
- Eligibility Requirements: Only certain companies may take advantage of the exemption created by Regulation Crowdfunding. Ineligible
issuersinclude non-US companies, reporting companies, certain investment companies, companies subject to “” disqualification, companies that have failed to comply with their reporting obligations under Regulation Crowdfundingduring the preceding two years, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.
- Issuer Offering-Size Limitations: Pursuant to amendments adopted by the SEC on November 2, 2020 (the “Rule Amendments”) and effective March 15, 2021, eligible
issuersmay now raise up to $5 million in any 12-month period through offerings under Regulation Crowdfunding. Depending on the facts and circumstances of the offering, amounts sold by affiliated entities of the issuer may also be counted against this maximum.
- Issuer Manner-of-Offering Requirements: All transactions relying on Regulation
Crowdfundingmust take place exclusively through an SEC-registered “intermediary”—either a - or an internet platform known as a “funding portal.” Offerings must be held open for a minimum of 21 days, and potential investors have certain opportunities to cancel their commitments prior to closing. Advertising and other forms of solicitation are permitted under Regulation Crowdfunding but are subject to significant limitations.
- Issuer Disclosure and Filing Obligations: Prior to commencing an offering under Regulation
Crowdfunding, an eligible issuermust complete and file a Form C, which requires the public disclosure of certain business and financial information of the issuerincluding financial statements prepared in accordance with US GAAP. An issuermust file offering progress reports to disclose material changes to this information until the offering has been completed and is required to file reports updating this information annually following the offering until the issuerbecomes public, repurchases all securities issued pursuant to Regulation Crowdfunding, liquidates or dissolves, or qualifies, for other specified exemptions.
- Investor Investment Limitations: The amount an individual may invest across all offerings under Regulation Crowdfunding during any 12-month period will depend on the individual investor’s annual income and net worth. Pursuant to the Rule Amendments, are not subject to individual investment limitations. Individual investment limitations for non-
accredited investorsare now based on the greater of annual income or net worth, up to a cap of $107,000.
The crowdfunding landscape continues to evolve. As noted, in November 2020, the SEC adopted the Rule Amendments, which impacted the offering-size limits and investor investment limits under Regulation
In May 2020, the SEC provided eligible issuers conditional relief from certain Regulation
An issuer considering a crowdfunded offering needs to weigh the costs and benefits of compliance with the regulations, including whether it has available the required financial statements and, more importantly, whether it is willing to publicly disseminate financial statements and other information about its financial condition and business mandated by Form C and to obligate itself to update such information on an ongoing