Equity Crowdfunding Rules: The Good, The Bad & The Ugly

 

  SeedInvest Equity Crowdfunding

SeedInvest is thrilled by the SEC’s proposal on equity crowdfunding. The proposed rules are balanced, well thought-out and clearly indicate an intent to make crowdfunding offerings a viable financing path for startups. We thank the SEC for referencing our letters (including CFIRA’s) 60 times, for sticking to the original intention of the JOBS Act and for submitting a very workable proposal. There is a lot of work to be done but today was a big step in the right direction.

The Good

1) Investor Self-certification. The proposed rules allow individuals to self–certify their income and net worth and the amount of their other crowdfunding investments for purposes of the individual investor limits. This is in contrast to the high verification requirements for Rule 506(c) of Regulation D and is consistent with how accredited investor checks have been done in the past (prior to Sept 23). Placing the burden on platforms instead of individuals themselves to police this would have been overly onerous. Title II advocates are certainly scratching their heads right now.

2) Offering Amount Flexibility. There was concern that a company could only raise the amount they offer initially and not a dollar more. The commission has provided for a target amount (ie. $250k) and a separate maximum amount (ie. 750k). This is the way the real world works and they got this one right.

3) Advertising. The proposed rules allow companies a much broader ability to advertise than expected. Issuers can push out notices about the offering through all channels, including social media, internet, newspaper, television, etc. so long as the notice is limited to factual information about the company and the offering (and can include details about (1) the amount of securities offered; (2) the nature of the securities; (3) the price of the securities; and (4) the closing date of the offering period). This will allow companies to do kickstarter style campaigns using social media, television and otherwise.

4) Simultaneous Reg D and Crowdfunding Offerings Allowed. The proposed rules will allow companies to conduct a typical Reg D offering (both 506(b) or 506(c) with general solicitation) simultaneously with a crowdfunding offering. There was concern that Reg D offerings would count toward the $1M limit. This means that, if you comply with the rules of both offerings, you could raise from a venture capitalist or angels and simultaneously make a crowdfunding offering using a platform. Amounts raised under Reg D would not count towards the $1M crowdfunding limit. The investor limits will still apply to accredited investors and foreign investors for purposes of the crowdfunding offering.

5) Education Requirements. As the Chair of the Education Committee at the Crowdfunding Professional Association, we are very pro investor and entrepreneur education. The Commission did a good job of requiring proper delivery of educational materials without overburdening users. One important nit – we did not see any requirement that investors understand the importance of diversification. It is critical that crowdfund investors receive this message and not expect their single investment to be the next Instagram.SeedInvest is thrilled by the SEC’s proposal on equity crowdfunding.  The proposed rules are balanced, well thought-out and clearly indicate an intent to make crowdfunding offerings a viable financing path for startups.  We thank the SEC for referencing our letters (including CFIRA’s) 60 times, for sticking to the original intention of the JOBS Act and for submitting a very workable proposal.  There is a lot of work to be done but today was a big step in the right direction.

The Good

1)      Investor Self-certification.  The proposed rules allow individuals to selfcertify their income and net worth and the amount of their other crowdfunding investments for purposes of the individual investor limits.  This is in contrast to the high verification requirements for Rule 506(c) of Regulation D and is consistent with how accredited investor checks have been done in the past (prior to Sept 23).   Placing the burden on platforms instead of individuals themselves to police this would have been overly onerous.  Title II advocates are certainly scratching their heads right now.

2)      Offering Amount Flexibility.  There was concern that a company could only raise the amount they offer initially and not a dollar more.  The commission has provided for a target amount (ie. $250k) and a separate maximum amount (ie. 750k).  This is the way the real world works and they got this one right.

3)      Advertising.  The proposed rules allow companies a much broader ability to advertise than expected.  Issuers can push out notices about the offering through all channels, including social media, internet, newspaper, television, etc. so long as the notice is limited to factual information about the company and the offering (and can include details about (1) the amount of securities offered; (2) the nature of the securities; (3) the price of the securities; and (4) the closing date of the offering period).  This will allow companies to do kickstarter style campaigns using social media, television and otherwise.

4)      Simultaneous Reg D and Crowdfunding Offerings Allowed.   The proposed rules will allow companies to conduct a typical Reg D offering (both 506(b) or 506(c) with general solicitation) simultaneously with a crowdfunding offering.    There was concern that Reg D offerings would count toward the $1M limit.  This means that, if you comply with the rules of both offerings, you could raise from a venture capitalist or angels and simultaneously make a crowdfunding offering using a platform.  Amounts raised under Reg D would not count towards the $1M crowdfunding limit.  The investor limits will still apply to accredited investors and foreign investors for purposes of the crowdfunding offering.

5)      Education Requirements.   As the Chair of the Education Committee at the Crowdfunding Professional Association, we are very pro investor and entrepreneur education.  The Commission did a good job of requiring proper delivery of educational materials without overburdening users.  One important nit – we did not see any requirement that investors understand the importance of diversification.  It is critical that crowdfund investors receive this message and not expect their single investment to be the next Instagram.

 

 

READ FULL ARTICLE

 

 

http://AccreditedInvestors.net

Leave a comment

*