Crowdfunding Responsibilities Of Issuers
By: Simon R. Inman, Partner
This is the second in a series of bulletins about the crowdfunding exemption from the requirements for SEC registration included in the JOBS Act of 2012. The first bulletin, published in March 2013, described the background and overall objectives of the legislation. The purpose of this bulletin is to explore in a little more detail the obligations of businesses seeking to use crowdfunding as a source of capital.
Not surprisingly, basic information regarding the business, its actual and proposed operations, the intended use of the proceeds, and the identity of all directors, officers and holders of more than 20% of the equity must be provided. In addition, certain financial information must be provided as follows:
- If the offering is $100,000 or less, most recent tax returns (if any) and current financial statements certified by the CEO to be true and complete;
- If the offering is more than $100,000 but not more than $500,000, financial statements reviewed by an independent CPA; or
- If the offering is more than $500,000, audited financial statements.
Even though the maximum amount that can be raised through crowdfunding is limited to $1,000,000 in any 12 month period, the cost of having reviewed or audited financial statements is likely to mean that most crowdfunding offerings will be $100,000 or less. Although the legislation gives the SEC the power to increase the offering limit for audited financial statements, it does not have power to increase the offering limit for reviewed financial statements unless the legislation is amended.
The legislation also includes a number of additional requirements that will no doubt be supplemented and expanded by the SEC rulemaking. Issues that the rules will address will include the following:
- A description of the type of securities to be offered;
- The price per share, the target amount to be raised and the deadline for raising it;
- How the offering may be advertised (companies will likely only be allowed to direct interested investors to the funding portal website);
- Procedures for filing the offering with the SEC;
- Requirements for providing of annual reports to investors and the SEC;
- Limitations on the ability of the companies to pay commissions or other compensation associated with the promotion of the offering;
- Liability for material untrue statements and omissions;
- Restrictions on allowing investors to sell the securities for the first 12 months (except in certain limited circumstances); and
- A prohibition on foreign entities using the crowdfunding exemption.
The next bulletin will explain in more detail the funding portals and the final bulletin will review some of the practical implications for companies wanting to take advantage of crowdfunding.
For more information contact Simon Inman at firstname.lastname@example.org or at (707) 526-4200.
100 B Street, Suite 400
Santa Rosa, CA 95401