On May 16, new guidance went into effect that allows companies to raise as much as $1 million a year through regulated online portals as long as the companies have submitted annual financial reports to the Securities and Exchange Commission (SEC). They do not have to actually register with the SEC. Such ‘crowdfunding’ offers could be an alternative to venture capital and angel investor financing for startups and other privately held businesses. But it is not for everyone.
In October, the SEC finalized its long-delayed guidance under the Jumpstart Our Business Startups (JOBS) Act in Release No. 33-9974, Crowdfunding. It has been more than a month since the guidelines went into effect — and so far, the market has been slow to warm up.
The new rule allows online crowdfunding offers to be made to accredited and nonaccredited investors. The former are defined as those who make $200,000 a year, or $300,000 jointly with a spouse, or have at least $1 million in net worth, not including their primary residence. Both accredited and nonaccredited investors are, however, limited in how much they can contribute to crowdfunding deals each year based on their net worth and income.
Online crowdfunding offers must be made through intermediaries that must either be registered brokers or a new type of registered entity called a ‘funding portal.’ Currently, only nine funding portals have successfully registered with the SEC. Setting up a portal requires significant upfront investment in technology, financial reporting, and other compliance costs.
The SEC holds funding portals to a high standard, expecting them to act as ‘gatekeepers’ to protect investors against fraud. The new guidance calls for intermediaries to establish a ‘reasonable basis’ to believe an issuer is in compliance with the crowdfunding rules. And intermediaries must provide investors with educational materials, including descriptions of the securities offered and when they can be resold. In general, stock or debt purchased in a crowdfunding deal is subject to a one-year holding period.
Over the next three years, the SEC will evaluate whether the restrictions in the crowdfunding guidance are too burdensome for run-of-the-mill startups. If so, lawmakers may go back to the drawing board once the process becomes more established. Contact us for more information on this up-and-coming opportunity to raise capital and market awareness for your private business. Our accounting professionals can help your crowdfunding offer comply with the SEC’s financial reporting requirements.