On November 2, 2020 the Securities and Exchange Commission (SEC) approved long-awaited rule changes to the exempt offering framework for securities regulations. These changes include significant revisions to Regulation Crowdfunding designed to expand access to capital for small and medium-sized businesses and entrepreneurs across the United States.
Regulation Crowdfunding, also known as Reg CF, is a federal securities exemption that preempts state-level securities registration. Some states still require notice filings for Reg CF offerings for businesses domiciled in that particular state or businesses that raise money from investors in that particular state. The state preemption feature of Reg CF makes capital raising less costly for small businesses and opens up more investment opportunities from contributors.
A brief summary of the material provisions of Reg CF is below. Please contact our office and speak with one of our corporate and securities attorneys for more information.
Issuers Eligible to Use Regulation Crowdfunding
- Reg CF is limited to issuers who (i) are organized in the U.S. (or District of Columbia), (ii) are not subject to reporting requirements of section 13 or section 15(d) of the Securities and Exchange Act of 1934 (Exchange Act), and (iii) are not investment companies.
- The issuer and its affiliates must not have any “bad boy” disqualifications as specified in §227.503(a).
- The issuer must have a specific business plan, provided that its business plan cannot be solely to engage in a merger or acquisition with an unidentified company or companies.
Offering Limitations
- Reg CF allows an issuer to raise up to $5,000,000 in a 12-month period.
- The issuer must conduct the offering using an intermediary (a broker or funding portal registered with the SEC).
- If any investor is not an “accredited investors” as defined in Rule 501, certain limitations apply to the amount such non-accredited investor is able to invest. There is a $2,500 floor, and the amount may be increased depending on the non-accredited investor’s annual income or net worth.
- Reg CF does not allow for “best efforts” offerings. If an issuer receives fewer investments than stated in its offering statement, all investment commitments will be cancelled and committed funds will be returned to the investors. However, the issuer may raise more than the anticipated offering amount.
Testing the Waters
- Reg CF allows issuers to reach out to potential investors before commencing an offering to see how much interest there is for the issuer’s securities. This is also known as “testing the waters” and can be beneficial for gauging how successful a Reg CF offering may be.
- An issuer may communicate orally or in writing to determine whether there is any interest in the contemplated Reg CF offering. It should be noted that such communications are deemed to be an offer of a security for sale for purposes of the antifraud provisions of the Federal securities laws.
- No solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, from any person is permitted until the offering statement is filed. The communications must:
- State that no money or other consideration is being solicited, and if sent in response, will not be accepted;
- State that no offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only through an intermediary’s platform; and
- State that a person’s indication of interest involves no obligation or commitment of any kind.
Filing Requirements
- In order to utilize Reg CF, an issuer must file an offering statement on Form C with the SEC prior to conducting the offering. The Form C is also provided to the intermediary and investors.
- The offering statement is meant to give investors the information needed for them to make an informed investment decision and includes information such as: the issuer’s corporate history, information about the officers, directors, and holders of 20% or more of a class of the issuer’s stock, the issuer’s business plan, and how the issuer will use proceeds from the offering.
- Once the offering is commenced, the issuer will also have an obligation to file annual reports on Form C-AR with the SEC. Annual reports are also provided to the intermediary and investors.
- The reporting obligations continue until terminated by the issuer and certain requirements must be met in order to qualify for terminating the reporting obligations.
- Financial statements must be included with the offering statement and annual reports. Depending on the total offering amount, the financial statements may need to be reviewed or audited by an independent public accountant.
Right to Rescind Offering; Reconfirmation
- Reg CF provides investors with right to cancel an investment commitment at any time until 48 hours prior to the offering deadline identified in the issuer’s offering materials.
- Additionally, if there is any material change to the offering, each investor must reconfirm their investment or the investment commitment is cancelled and funds returned to the investor.
Disclaimer
Austin Legal Group, APC (ALG) does not make any representations or warranties, expressed or implied, as to the accuracy, completeness or fitness for a particular purpose of this or any article. This article is meant for general informational purposes only and should not be construed as, and does not constitute, legal advice. No one should take any action regarding the information in this article without first seeking the advice of an attorney. This article does not create an attorney-client relationship. No attorney-client relationship will exist with ALG or any attorney affiliated with it unless a written contract is signed by all parties and any conditions in such contract are satisfied. Please reach out to Gina M. Austin, Esq. by phone at (619) 924-9600 or by email at gaustin@austinlegalgroup.com for more information.
