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4 Things You Need to Know About Crowdfunding Regulations

In a real-time, 140-character, social media world, crowdfunding (the practice of funding a venture by raising contributions from a broad base of investors, often electronically) has become the method du jour to raise capital. Whether equity crowdfunding will ever replace angel investing is another matter. 

Title III of Regulation Crowdfunding is scheduled to take effect on May 16, 2016. Hopefully, this will enhance the legitimacy of the crowdfunding process as well as make it easier for issuers, portals and investors. Key elements of Title III outline (1) the maximum amount of money that can be raised in any 12-month period; (2) issuer disclosure requirements; (3) investor limitations; and (4) the regulatory framework for broker-dealers and portals. 

  1. Funding LimitsThe amount an issuer can raise via crowdfunding is limited to $1 million during any 12-month period.  
  2. Disclosure RequirementsAll companies raising more than $100,000 must have CPA-reviewed financial statements; funding above $500,000 requires audited financial statements. Companies using equity crowdfunding must disclose securities pricing, method for determining price, target offering amount, management’s discussion of company’s financial condition, business description, and use of proceeds analysis, along with information on officers, directors and others owning 20% or more of equity.  
  3. Investor LimitationsInvestor limitations depend on annual income and/or net worth. Individual investors may not invest more than $100,000 annually across all crowdfunding platforms. 
  4. Broker-Dealer and Portal Framework Crowdfunding portals must be registered with the Securities and Exchange Commission and be members of the Financial Industry Regulatory Authority. Portals are used to educate investors. However, they must give investors all of the information concerning the offerings and cannot provide investment advice. Portals are also responsible for ensuring that investors are in compliance with income and net worth limitations. A company can only use one portal at a time when raising capital. 
About Alan Wink

Mr. Wink assists clients with capital budgeting, capital structuring and capital sourcing. He has worked with many tech and life science companies on developing the appropriate capital structure for their position in the business life cycle.

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