Securities-Based Crowdfunding as a Capital-Raising Tool for Small Businesses

The Jumpstart Our Business Startups Act (“JOBS Act”) formed a specific registration exemption for certain securities-based crowdfunding transactions.  Per the JOBS Act, the Securities and Exchange Commission (SEC) was required to adopt rules for Regulation Crowdfunding with guidelines for investor protections.  The final rules were issued by the SEC in October 2015, and went into full effect on May 16, 2016.

Now, under the newly effective rules on Regulation Crowdfunding, companies can raise capital from ordinary people (not just accredited investors) using online crowdfunding platforms, without having to register securities if the following conditions for issuers and individual investors are met within a 12-month period:

·         An issuer (i.e. a business or entrepreneur) can raise a maximum aggregate amount of $1 million through crowdfunding offerings;

·         Individual investors, with an annual income or net worth less than $100,000, can invest the greater of: (a) $2,000, or (b) 5% of the lesser of their annual income or net worth crowdfunding offerings

·         Individual investors, with both their annual income and net worth are equal to or greater than $100,000, can invest 10% of either their annual income or net worth (whichever is less).

·         During the 12-month period, the total amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000. 

This is great news for entrepreneurs and startups, because from a regulatory standpoint the regulations make it easier for companies to use securities-based crowdfunding platforms as another tool to raise capital.  In many ways equity crowdfunding will work similar to a less formal mini-IPO.   It is also a plus for startups that this equity crowdfunding can be used as an alternative to traditional venture capital.  Regulation Crowdfunding is also great news for individual investors, because non-accredited investors—anyone in the general public, can have the opportunity to invest in a given year in accordance with the established limits.