The JOBS Act and subsequent Securities and Exchange Commission (SEC) rule changes allowing private companies to engage in securities based crowdfunding are making it easier for smaller companies to raise capital. But the reduced legal hurdles are accompanied by new administrative ones.
Disclosure
Before a company can conduct a crowdfunding campaign relying on “Regulation Crowdfunding”, it needs to disclose certain information to potential investors.
Price
What will the price of the securities be to the public? How did you come up with that price? What deadline are you imposing to reach your fundraising target? Will you accept investments over and above the target fundraising amount?
Financial Condition
GAAP financials are required, and if you’re raising more than $100,000 up to $500,000, the financials have to be reviewed. If you’re raising over $500,000 to $1,000,000, then you’ll need those financials to be audited; unless it is your first time relying on these new rules in which case reviewed financial statements are sufficient.
Use of Proceeds
Be prepared to describe your business and details of how you plan to utilize the funds raised through the general solicitation fundraising. Business information will include listing officers, directors and any owners of 20 percent or more of the company.
Ongoing Reporting
Regulation Crowdfunding requires issuers to provide ongoing reports to both the SEC and to investors. Operational and financial information should be provided annually, within 120 days following the close of the fiscal year. To satisfy the rules, posting a copy of this report on the company website will be considered sufficient for investors, but if that is your plan, you must include in your original offering statement the location where investors will be able to retrieve and view these reports. Only a significant change in company status or in the securities originally offered under Regulation Crowdfunding will trigger a change in that ongoing reporting requirement.
Lots of Rules
There are a lot of conditions on Regulation Crowdfunding – too many to list out here. Unfortunately, that means that Regulation Crowdfunding won’t be a great fit for everyone, but for those that can use it, it’s another tool in the arsenal to raise capital. Most issuers will find that Title II, Rule 506(c) style crowdfunding will be more practical to use for capital raises.
In most cases, verification of accredited investor status is still required. Find out how safe, secure and efficient VerifyInvestor.com’s proprietary system is, and how it can help you on your way to achieving your fundraising goals.
