After months of anticipation, the SEC has finally opened up registration for online platforms that intend to legally solicit offerings through equity crowdfunding (Regulation CF). For the first time in 80 years, all Americans will have equal access to invest in private companies.
What is Regulation CF?
Regulation Crowdfunding is another implementation of the Title III Jumpstart Our Business Startups Act which allows for private business to raise capital via equity crowdfunding platforms to unaccredited investors.
Companies are only allowed to raise up to $1,000,000 in a single round, provide detailed disclosure document to the SEC and potential investors, and conduct transactions online using a registered intermediary. They also must include financial statements prepared for the company in accordance with GAAP, and have various levels of accountant review or audit. Issuers are also required to file annual updates with the SEC with respect to their business operations.
Unaccredited investors are limited in the amount they can invest on an annual basis through Regulation CF. If annual income or net worth is less than $100,000, they can invest no more than $2,000 or 5% of their annual income or net worth, whichever is less. If they exceed the $100,000, they are allowed to invest 10% of whichver is less between annual income and net worth, and up to a maximum $100,000 in crowdfunding investments on an annual basis.
Prior to Title III of the JOBS Act, securities laws allowed only 3% of Americans to invest in startups, with the remaining 97% restricted from opportunities to benefit/profit from today’s successful startups (i.e. Facebook and Linkedin).
The legalization of equity crowdfunding breaks down those existing legal barriers, and gives 230 million American adults the ability to discover and invest in groundbreaking startups.
Individuals can look forward to investing through online equity crowdfunding platforms as early as mid-May 2016 (pending SEC approval). However, Title III does not completely eliminate the regulatory barriers to investing or raising capital. Here are some important details you should consider leading up to the equity crowdfunding implementation:If you’re looking to invest… Investing Restrictions:
- Individuals who have an annual income or net worth of $100k or less: may invest $2,000 or 5% of their annual income or net worth, whichever is greater.
- Individuals who have an annual income or net worth of $100k or more: may invest 10% of their annual income or net worth but may not exceed $100k.
- Raising $100k or less: startups must provide (1) the amount of total income, taxable income and total tax (or equivalent line items) as reported on the U.S. federal income tax returns filed by the startup for the most recently completed fiscal year, if any, and (2) the financial statements of the startup, in both cases certified by the principal executive officer of the startup to be true and complete in all material respects.
- Raising $100k to $500k: startups must provide financial statements reviewed by a public accountant that is independent of the startup.
- Raising $500K to $1M: startups must provide audited financial statements from an independent PCAOB auditor. However, the SEC has provided a limited one-time exclusion from the audit requirements for startups conducting their first Regulation CF offering provided that the startup does not have audited financial statements available at the time. Such startups may provide reviewed financials instead.
Sign up for our newsletter to get updates on investor crowdfunding news and the ability to access startup investment opportunities