By Sherwood Neiss
In what can be considered a historic day for startups, small businesses and entrepreneurs all across the United States, on November 2, 2015 the Securities and Exchange Committee (SEC) voted 3 to 1 to approve the final rules for debt and equity crowdfunding (aka Regulation Crowdfunding). In about 180 days, tech startups and Main Street businesses will be able to raise up to $1 million from their friends, followers, and community via SEC registered websites. There is a lot you need to know about the new rules, so let’s jump right in:
1. This is NOT Kickstarter
If you are interested in selling equity in your startup or borrowing money from the customers of your small business, you must realize you are selling securities in your business and that this is a highly regulated activity (hence the 685 pages of rules). Take extra time to understand what you CANNOT do so that you do not get in trouble with the law.
2. What has changed?
Limitations under old regulations qualified you to issue securities without doing a full IPO as long as you limited the number of investors, used only accredited investors (those with income over $200,000/year or with a net worth over $1 million), and did not use any public means of solicitation (which included the Internet, email, newspapers, radio, television, etc). Those limits have all changed. Now, anyone can invest at least $2,000, but beyond that amount, an investor is still restricted based on income or net worth. (I’ve put together a calculator you can download to check your limits as an investor under the new rules.) Issuers (aka startups and Main Street businesses) can use email, Facebook, Twitter, etc., to offer an investment (debt or equity) in their firm as long as they hit 100 percent of their funding target, not exceed $1 million and do so on a SEC-registered funding portal (cheaper) or via a broker/dealer (more expensive).
3. Compliance is KEY
If you fail to comply with the rules (like submitting your annual report with the SEC within 120 days after the end of your fiscal year and posting a link on your website), you could lose your exemption, which means that you will face hefty fines and legal fees to defend yourself. Be sure to follow all the rules/filings before, during, and after you raise your funds. For instance, you cannot list your offering on more than one platform. Also if you want to host a launch party to promote your offering, do NOT do so with the funding portal (unless it is a broker-dealer) because that is considered offering investment advice (by the funding portal), which is not allowed.
4. Think of who is in your crowd when deciding on a path forward
If you have both accredited and unaccredited investors but wish (or need) to raise over $1 million, then consider doing what is called a parallel offering. Do a Regulation Crowdfunding offering for the unaccredited investors and at the same time a Title II offering, which allows for general solicitation of accredited investors and does not have the $1 million cap. Just be careful not to reference both offerings in your marketing materials or they could be considered “integrated.” They should be independent offerings.
5. You cannot crowdfund a fund to invest in crowdfunded opportunities
Each offering must include a business plan for which the underlying purpose must be a bonafide business and not an investment vehicle. Sorry, you creative types.
6. Your investors can change their mind up to 48 hours prior to closing
7. Disclose, disclose, DISCLOSE
8. Get comfortable with your financials
9. Your personal financial info could become public
Read the full article at venturebeat.com.
Sherwood Neiss is a partner at Crowdfund Capital Advisors. Neiss helped lead the U.S. fight to legalize debt and equity based crowdfunding, coauthored Crowdfund Investing for Dummies, and cofounded Crowdfund Capital Advisors, where he provides strategy and technology services to those seeking to benefit from crowdfund investing.