Following the April 2, 2020 virtual meeting of the SEC Small Business Capital Formation Advisory Committee in which the Committee urged the SEC to ease crowdfunding restrictions to allow established small businesses to quickly access potential investors (see HERE), the SEC has provided temporary, conditional expedited crowdfunding access to small businesses. The temporary rules are intended to expedite the offering process for smaller, previously established companies directly or indirectly affected by Covid-19 that are seeking to meet their funding needs through the offer and sale of securities pursuant to Regulation Crowdfunding.
The temporary rules will provide eligible companies with relief from certain rules with respect to the timing of a company’s offering and the financial statements required. To take advantage of the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between May 4, 2020 and August 31, 2020.
TEMPORARY RULES
Title III of the JOBS Act, enacted in April 2012, amended the Securities Act to add Section 4(a)(6) to provide an exemption for crowdfunding offerings. Regulation Crowdfunding went into effect on May 16, 2016. The exemption allows issuers to solicit “crowds” to sell up to $1,070,000 (as adjusted for inflation in 2017) in securities in any 12-month period as long as no individual investment exceeds certain threshold amounts. The threshold amount sold to any single investor cannot exceed (a) the greater of $2,000 or 5% of the lower of annual income or net worth of such investor if the investor’s annual income or net worth is less than $100,000; and (b) 10% of the annual income and net worth of such investor, not to exceed a maximum of $100,000, if the investor’s annual income or net worth is more than $100,000. When determining requirements based on net worth, an individual’s primary residence must be excluded from the calculation. Regardless of the category, the total amount any investor can invest is limited to $100,000. For a summary of the provisions, see HERE.
In March 2020, the SEC published proposed rule changes to harmonize, simplify and improve the exempt offering framework including Regulation Crowdfunding. The proposed rules would increase the offering limit to $5 million; increase the investment limit by altering the formula to be based on the greater of, rather than lower of, an investor’s annual income or net worth; remove investment limits on accredited investors; allow the use of special purpose vehicles and reduce the types of securities that can be sold in a Regulation Crowdfunding offering. However, the timing for implementation of the proposed rules, either as proposed or with changes, is uncertain.
As noted, the temporary rules are intended to provide existing eligible smaller businesses with quick access to capital by reaching out to the “crowd” which may include local investors, customers, vendors, etc., that are willing to support small businesses. This table, which was included in the SEC press release announcing the temporary rules, and to which I have provided explanatory and further detailed information, is a very good summary of the temporary rules.
| Requirement | Existing Regulation Crowdfunding | Temporary Amendment |
| Eligibility | The exemption is not available to:Non-U.S. issuers;Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;Investment companies;Blank check companies;Issuers that are disqualified under Regulation Crowdfunding’s disqualification rules; andIssuers that have failed to file the annual reports required under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement. | To rely on the temporary rules, issuers must meet the existing eligibility criteria PLUS:The issuer cannot have been organized and cannot have been operating less than six months prior to the commencement of the offering; andAn issuer that has sold securities in a Regulation Crowdfunding offering in the past, must have complied with the requirements in section 4A(b) of the Securities Act and the related rules (that is, they must have complied with all the Regulation Crowdfunding rules and requirements). |
| Offers permitted | After filing of offering statement (including financial statements) | After filing of offering statement, but financial statements may be initially omitted (if not otherwise available) |
| Investment commitments accepted | After filing of offering statement on Form C (including financial statements) | After filing of offering statement on Form C that includes financial statements or amended offering statement that includes financial statements.That is, the temporary rule allows a test-the-waters period by allowing the company to file a Form C and post offering information on a funding platform, gathering indications of interest, prior to filing financial statements. If the offering does not garner interest, the company may determine to abandon or delay the offering and would not have occurred the expense of financial statement preparation.Certain disclosures will need to be added if no financial statements are included and no investment commitments can be accepted until the financial statements have been provided. |
| Financial statements required when issuer is offering more than $107,000 and not more than $250,000 in a 12-month period | Financial statements of the issuer reviewed by a public accountant that is independent of the issuer | Financial statements of the issuer and certain information from the issuer’s federal income tax returns, both certified by the principal executive officer.Must also provide a statement that financial information certified by the principal executive officer has been provided instead of financial statements reviewed by an independent public accountant. |
| Sales permitted | After the information in an offering statement is publicly available for at least 21 days | As soon as an issuer has received binding investment commitments covering the target offering amount (note: commitments are not binding until 48 hours after they are given) |
| Early closing permitted | Once target amount is reached if:The offering remains open for a minimum of 21 days;The intermediary provides notice about the new offering deadline at least five business days prior to the new offering deadline;Investors are given the opportunity to reconsider their investment decision and to cancel their investment commitment until 48 hours prior to the new offering deadline; andAt the time of the new offering deadline, the issuer continues to meet or exceed the target offering amount. | As soon as binding commitments are received reaching target amount if:The issuer has complied with the disclosure requirements in temporary Rule 201(z) (which is a statement that the offering is being conducted on an expedited basis due to circumstances relating to Covid-19 and pursuant to the SEC’s temporary relief and any additional statements related to the particular relief being relied upon such as financial statement relief);The intermediary provides notice that the target offering amount has been met; andAt the time of the closing of the offering, the issuer continues to meet or exceed the target offering amount. |
| Cancellations of investment commitments permitted | For any reason until 48 hours prior to the deadline identified in the issuer’s offering materials. Thereafter, an investor is not able to cancel any investment commitments made within the final 48 hours of the offering (except in the event of a material change to the offering). | For any reason for 48 hours from the time of the investor’s investment commitment (or such later period as the issuer may designate). After such 48-hour period, an investment commitment may not be cancelled unless there is a material change to the offering. |