While the possibility of crowdfunding has opened up exciting new opportunities for issuers and investors, the Securities and Exchange Commission (SEC)’s new rules are quite complicated. See 5 Key Things to Know About Crowdfunding for more information on crowdfunding.

While not comprehensive, the chart below provides a list of some of the major rules that issuers, investors and intermediaries should keep in mind when considering the benefits and drawbacks of taking advantage of the new crowdfunding regulations.

Issuer

Must

Must Not

File a Form C with the SEC prior to commencing an offering.

Be a company subject to public reporting requirements of the Exchange Act of 1934, a foreign issuer, a mutual fund or private fund, an investment company as defined in the Investment Company Act of 1940, a disqualified issuer, shell company, a company with no business plan or a company with the exclusive purpose of engaging in a merger or acquisition with an unidentified company.

Conduct offering exclusively through one intermediary with all transactions occurring in an “online-only” format.

Advertise in connection with a crowdfunding (may communicate with investors through platform-provided communication channel, however, so long as issuer identifies itself as an issuer).

Provide financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP).

 

Provide a narrative discussion of the company’s financial condition, including discussion of liquidity, capital resources and historical outcomes.

 

File an annual report with SEC and post the report on company website.

 

Provide regular updates regarding the issuer’s progress towards meeting the offering amount.

 

Provide notice of amendments or material changes to issuer’s previous disclosures.

 

 

Investors

Must

Must Not

 

Invest more in any 12-month period than the greater of US$2,000 or 5% of the investor’s annual income or net worth, if the investor’s annual income or net worth is less than US$100,000.

 

Invest more in any 12-month period than the lesser of (i) 10 % of the investor’s annual income or net worth or (ii) US$100,000, if the investor’s annual income or net worth is US$100,000 or greater.

 

Intermediary the Funding Portal

Must

Must Not

Register as a Funding Portal using Form Funding Portal (FP-NMA).

Offer investment advice or recommendations.

Be a member of the Financial Industry Regulation Authority (FINRA) and be subject to its bylaws.

Solicit purchases or sales, nor offer to buy securities listed or displayed on the portal.

Implement written policies and procedures that are meant to achieve compliance with US federal securities laws.

Compensate employees, agents or other persons for soliciting offerings or selling securities that are displayed on the portal (may compensate third parties for general business advertising).

Comply with the same privacy rules applicable to broker-dealers.

Purchase personally identifiable information of investors or potential investors.

Require investors to transmit money to qualified third-party escrow agents, including registered broker-dealers, banks or credit unions.

Receive, maintain, possess or handle investor funds or securities.

Take steps to reduce risk of fraud occurring on platform.

 

Permit its directors, officers, partners or similar persons to have any financial interest in an issuer using the intermediary’s services or receive compensation for services provided to the issuer in connection with the offer and sale of securities (the intermediary itself is permitted to have a financial interest in an issuer so long as it receives that interest as compensation for services provided with the offer and the financial interest consists of securities of the same class, terms, conditions and rights of other securities being sold or offered through crowdfunding).

Have reasonable basis to believe that an issuer complies with the requirements of the Securities Act and crowdfunding rules and keeps accurate records of the holders of securities.

Sell securities for an issuer if there is a reasonable basis to believe the issuer or the offering creates a possibility of fraud.

Have a reasonable basis to believe that investors using the platform are abiding by crowdfunding investment limits.

Sell securities for an issuer whose officers, directors, 20% beneficial owners or other similar persons are subject to disqualification.

Conduct background checks and security enforcement checks on issuers, their officers, directors or other similar persons.

Sell securities if there is reasonable belief that the intermediary cannot assess the risk of fraud related to an offering.

Immediately revoke access to an issuer when the intermediary learns of information that creates a reasonable basis to believe there is the potential for fraud.

Accept investment from investors who have not opened an account with the intermediary.

Provide investors with certain educational materials.

Restrict the public from viewing discussions on communication channels.

Provide information about issuer no less than 21 days prior to the first day securities are sold.

Directly participate in communication channels or allow individuals without accounts to post comments on the communication channels.

Provide information issuer is required to make available at least 21 days prior to securities being sold, and maintain information on portal through the completion or cancellation of the offering.

 

Provide communication channel on platform to allow investors to communicate with each other as well as with issuers that are making offerings on the platform (founders, employees or others receiving compensation to promote offering must disclose their position).

 

Upon receiving investment, electronically notify investors of: (1) the dollar amount of investment, (2) the price of security (if known), (3) the name of the issuer and (4) the deadline to cancel investment.

 

Upon completion of transaction, electronically notify investor of: (1) the date of the transaction, (2) the type of securities purchased, (3) the number and prices of securities the issuer sold, (4) the price, nature and number of securities purchased by the investor, (5) if applicable, the first date issuer can call the security and (6) the source, form and amount of payment the intermediary will receive.

 

Promptly notify investors of material changes to offerings and cancel any investments made prior to the material change unless the investor reconfirms investment within five days of such notice.

 

Conclusion

While the preceding chart is a useful guide for understanding the roles of an issuer, investor and intermediary under the SEC’s new crowdfunding rules, companies interested in pursuing crowdfunding equity should consult with legal counsel for comprehensive guidance.

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