The President recently signed into law legislation that aims to make it easier for small companies to raise capital through “crowdfunding”. Crowdfunding will permit private companies to raise up to $1.0 million in a 12 month period through a registered broker or a registered funding portal. Investors would be limited in the total amount they could individually invest, with investors with an annual income or net worth of less than $100,000 topping out at a maximum investment of $2,000, although individuals above that threshold will be able to invest as much as 10% of their net worth or annual income. For those of you doing the math, actually raising $1.0 million could require the involvement of up to 500 investors, which is where we get the term “crowdfunding”. Unlike most small offerings, this type of offering would permit public advertising and in fact, a crowdfunding offering would require the involvement of either a registered broker or a registered funding portal. Advertisement of the offering would go through the broker or portal. Also, securities sold under the crowdfunding provisions are exempt from state securities registration requirements, which can become burdensome to comply with if a company is selling securities in several states.
Of course, an opportunity of this sort does not come without a little bit of pain. The company would be required to provide certain required information about the company, including its financial results, business plans, intended use of proceeds and a description of certain risks of investing in the company along with other information. The company would also be obligated to provide annual results of operations to both investors and the Securities and Exchange Commission, and while brokers and portals cannot be compensated based on the success of the offering, they will be able to charge a fee of some nature for their services. While $1.0 million will go a long way for some companies, keep in mind that the “net” isn’t likely to be the entire $1.0 million - the broker or portal will certainly require compensation, and disclosures are likely to need legal review and drafting. Also, the financial statement requirements may require the help of an accountant. Finally, there are a lot of companies that need more than $1.0 million, and the new law does nothing to relieve the requirements for larger offering amounts, which will still be mostly limited to 35 “typical” investors plus an unlimited number of high net worth/high earning investors. Also, an investor cannot transfer securities acquired in a crowdfunding offering for one year from the date of purchase, except in limited circumstances.
We don’t have the full picture yet for the requirements of crowdfunding. The Securities and Exchange Commission has about nine months to pass regulations that may impose additional requirements on the use of the crowdfunding technique.
Take Note: Most people don’t realize that notes, bonds, common stock, preferred stock, limited partnership interest, membership interests in a limited liability company and similar interests are all examples of a “security”. If you (or your company) sell a security, federal and state law requires that you first register the security or comply with an exemption from the registration requirements. Securities law issues are complicated. Please call us if you have any questions.