crowdfunding

Crowdfunding Capital markets in the United States are arguably the strongest in the world. Recent developments could strengthen them even more by making equity investing and equity capital-raising much more accessible.

In an effort to lower the cost and increase the availability of equity investing to small businesses, the SEC just adopted Regulation Crowdfunding (Title III of the Jobs Act adding Securities Act Section 4(a)(6)). These are the much-awaited final rules permitting equity crowdfunding, which allows small and startup companies to raise capital via the internet through relatively small contributions from investors.

Under the terms of the new rules, crowdfunding transactions for eligible U.S. companies will be exempted from SEC registration, provided

the aggregate amount the issuer sells to all investors in a 12-month period does not exceed $1 million,
The aggregate amount sold to any investor does not exceed a given percentage of that investor’s annual income or net worth (the greater of 2% or $5,000 for investors with either an annual income or net worth of less than $100,000; 10%, but not to exceed $100,000, for all others),
The transaction is conducted through either a registered broker-dealer or a registered “funding portal”, and
Issuers are in compliance with required SEC disclosure filings.

Certain companies are not eligible for the crowdfunding exception. These include all foreign-based companies, Exchange Act-reporting companies, certain investment companies, and companies that have previously failed to comply with crowdfunding reporting requirements.

Buyers of crowdfunding securities will be required to hold them for at least a year before they can resell them.

This alert applies to the Series 7, Series 24, Series 62, Series 79, and Series 82.

The Jumpstart Our Business Startups Act (JOBS Act) was signed into law on April 5, 2012. The act lessens regulations for the initial public offerings of certain companies and alters other federal rules. FINRA is expected to change some of its rules to reflect the new standards.

Here is a breakdown of the changes:

-IPOs for “emerging growth companies” are subject to fewer restrictions limiting communication between research analysts and investment bankers (Chinese Walls). An emerging growth company is defined as a company with less than $1 billion in annual revenue that had its first IPO no more than five years ago. This has been estimated to cover as much as 90% of companies looking to go public (Source: Reuters).

-Banks are allowed to publish research reports on emerging growth companies immediately after they take them public. The old rule required a 40 calendar day quiet period for IPOs.

-There are fewer restrictions on advertising emerging growth companies to accredited investors.

-Emerging growth companies are exempt from certain disclosure requirements.

-Startup companies can sell small amounts of shares to several investors to raise up to $1 million without being required to register the security (crowdfunding). An investor can contribute up to at most $10,000, though the individual maximum may be lower based on the investor’s annual income or net worth.

-The Act increases the number of shareholders a non-bank company may have before it is required to go public, from 500 persons to 2000 persons or 500 non-accredited investors.

-The Act increases the amount of funds that can be raised before a company is forced to register with the SEC, from $5 million (under Regulation A) to $50 million.

-Up to 2,000 shareholders may invest in a bank holding company before registration is required (up from 500).

-Various other issuer registration requirements have been modified (see the SEC’s JOBS Act FAQ).

The Act itself may be found here.

Sources, further reading:

http://dealbook.nytimes.com/2012/04/04/wall-st-examines-fine-print-in-a-new-jobs-bill/

http://dealbook.nytimes.com/2012/04/11/regulator-seeks-feedback-on-jobs-act/

http://www.sec.gov/divisions/corpfin/cfjobsact.shtml

http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf

http://www.reuters.com/article/2012/04/11/us-jobsact-ipos-idUSBRE83A0Z820120411

http://www.reversemergerblog.com/2012/03/17/summary-of-jobs-bill-and-update/

http://www.csmonitor.com/USA/Politics/2012/0308/What-does-the-JOBS-Act-actually-do-Six-questions-answered/What-s-in-the-JOBS-Act

http://www.pcmag.com/article2/0,2817,2402657,00.asp