Crowdfunding Ground Rules (If and When Adopted)

Many entrepreneurs were initially excited about a new law adopted in early 2012, the CROWDFUND Act included as a part of the JOBS Act, which they believed would permit investment crowdfunding to be used for funding emerging growth companies.  (As discussed our prior blog post, investment crowdfunding is different than patronage crowdfunding, where funders do not receive equity in exchange for their contributions.)  Yet that excitement has been slowly dashed as they waited . . . and waited . . . for the SEC’s implementing regulations.  True, the SEC published proposed regulations in October 2013, far beyond the 180 day Congressional directive within the CROWDFUND Act.  Yet, more than three years after the CROWDFUND Act was passed, the public is still waiting for the SEC to adopt its implementing regulations.

As we wait, here is what we know, at least from the SEC’s proposed regulations.  Issuers will be allowed to raise up to $1 million in a twelve-month period through investment crowdfunding.  Those who seek to raise investment crowdfunding money must use an approved “funding portal,” which is the platform through which the investment transactions occur.  A funding portal is essentially used to match the issuer with the investment opportunity.  Funding portals will be subject to numerous regulatory requirements, including registration with the SEC.  Common funding portals are expected to include existing crowdfunding sites, such as Kickstarter, Indigogo and RocketHub.

Investors will be limited in the amount they are able to invest through crowdfunding in a twelve month period.  Investors with a net worth or annual income of less than $100,000 may only invest $2,000 or five percent of their net worth or annual income (whoever is greater).  Investors with a net worth or annual income greater than $100,000 may invest up to ten percent of their net worth or annual income (whichever is greater).

In addition to tracking each investor’s actual financial contributions and knowing each investor’s contribution limits, companies are required to make certain statements to investors and the funding portal, including the purpose and intended use of the proceeds, pricing information, a description of the capital structure, and the deadline when the company expects to reach the target offering amount.  This disclosure information also must be filed with the SEC.

Keep in mind—this is still a proposed regulation and is not yet in effect.  The list of proposed regulatory requirements under the proposed regulations, both for companies and funding portals, is formidable.  As entrepreneurs have discovered, the CROWDFUND Act does not eliminate regulatory burdens that may exist, and it may actually increase those burdens.

Krause Law LLC is available to assist if you are exploring options for crowdfunding or other capital formation strategies.

(Blog Post authored by Prof. Malika S. Simmons, Of Counsel to Krause Law LLC)