New Crowdfunding: JOBS Act Title III For Issuers.


Yesterday, new crowdfunding regulations under the JOBS Act Title III opened a new door in crowdfunding – now non-accredited investors can invest in private companies using online intermediary platforms. If you are considering crowdfunding for your business, here is what you need to know:

  • A company can raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period via a registered broker-dealer or registered crowdfunding portal.
  • Under the rules certain companies would not be eligible to use the exemption, including non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

You will also have to file certain information with the Commission (Form C) and provide this information to investors and the intermediary facilitating the offering. Among other things, Form C would need to include information on:

  • The Crowdfunding Issuer, including name, address and entity form.
  • A description of the Crowdfunding Issuer’s business and business plan.
  • Financial Reporting Requirements. GAAP Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor:
    • Under $100k – Internal financial statement review
    • $100k-500k – CPA reviewed financial statements
    • 500k-1M – 3rd Party audited financial statements
    • 1st time crowdfunding issuers offering more than $500,000 would be permitted to provide reviewed, rather than audited, financial statements.
    • The price to the public of the securities or the method for determining the price.
    • The targeted amount of the offering and the deadline to reach it. Crowdfunding Issuers would also be required to describe how investors may cancel an investment commitment and include statements that:
      (1) commitments may be cancelled until 48 hours before the deadline;
      (2) if a material change to the offering occurs, investors must reconfirm their commitment or it will be cancelled and funds returned; and
      (3) if the Target Amount is not met, commitments will be cancelled and funds returned the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
  • A Crowdfunding Issuer would also be required to provide a narrative discussion of its financial condition covering, among other things, its historic results of operations and liquidity and capital resources.
  • The use of proceeds from the offering.
  • The Crowdfunding Issuer’s directors and officers, including their history with the company, business experience for the past three years and other information. The Crowdfunding Issuer’s 20% or greater beneficial equity-holders.
  • The identity of the Crowdfunding Portal for the offering and compensation being paid to it.
  • A number of current employees of the Crowdfunding Issuer.
  • Risk factors of the offering, including risks of being a minority owner.
  • Material terms of the Crowdfunding Issuer’s indebtedness.
  • A summary of other exempt offerings of the Crowdfunding Issuer during the last three years; and
  • Certain related-party transactions.

You would need to file updates to Form C (designated Form C-U) with information on progress toward reaching the Target Amount. The disclosure must be amended if a material change or update occurs (designated Form C-A).

You would be required to file with the SEC and post to your website an annual report within 120 days of the end of each fiscal year (designated Form C-AR). This annual report would include information similar to the offering statement on Form C, including the financial statement and narrative disclosures meeting the highest standard applicable to any of the issuer’s past offerings pursuant to the Crowdfunding Exemption, but excluding offering-specific information.

The annual reporting requirement would continue until one of the following events occurred:

  • The issuer becomes a reporting company.
  • All the issuer’s securities sold under Section 4(a)(6) are purchased by a third party or repurchased by the issuer.
  • The issuer liquidates or dissolves its business under state law.

You would be required to file a notice of termination of its annual reporting obligation on Form C-TR.

The new rules require reasonable but flexible disclosure – it may seem like a complicated process but it is worth it: crowdfunding is an invaluable alternative to funding a business and winning the love of the market.