What Is Accredited Crowdfunding? – Go Public Lawyer

As of September 23, 2013, the JOBS Act has permitted general solicitation and advertising in Rule 506 private placements.  While equity crowdfunding is not yet legal, both the SEC and FINRA have proposed rules for equity crowdfunding. This has caused confusion about the difference between equity crowdfunding and accredited crowdfunding pursuant to Rule 506(c) offerings particularly in going public transactions.

Rule 506 is a commonly used exemption in going public transactions where a resale registration statements on Form S-1 is used. While the public, and perhaps even some companies, may think of advertising and crowdfunding as the same thing, they are not.  Crowdfunding is generally defined as raising small amounts of money from many people, rather than large amounts from a few.  In recent years, it’s often been used to provide funding for disaster relief, political campaigns, and other “causes” of interest to many people.  

Accredited Crowdfunding – Rule 506(c)

Until Rule 506(c) became law, companies were forbidden to use general solicitation and advertising to promote their securities.  Now, companies are permitted to use advertisements and solicit investors for offerings of unregistered securities conducted pursuant to Rule 506(c) of Regulation D.  Companies are not required to advertise, and if that is their choice, they may use the “old” Rule 506, which does not allow solicitation of any kind. If they wish to advertise, they must use Rule 506(c).  In a Rule 506 placement, there may be an unlimited number of accredited investors, and up to 35 unaccredited investors.  Rule 506(c) permits advertising, but excludes non-accredited investors from participation.  In addition, issuers will be expected to make an effort to verify whether their accredited investors qualify for that status.  The SEC has suggested several methods they may use to accomplish that objective.  Those methods are discussed here.

Equity Crowdfunding

The SEC has yet to implement new rules that will permit equity crowdfunding in Regulation D offerings and as of now, has several proposals pending.

The JOBS Act provides that “crowdfunding portals” or qualified broker-dealers may be used to raise money.  The companies receiving the money may not advertise on their own behalf; the issuer can only direct interested parties to the portal being used.  The portal operators’ job is only to match investors with issuers.  They cannot offer investment advice, solicit sales, or handle investors’ money.  They must register with the SEC and FINRA as investment portals.

If a company takes the equity crowdfunding route, it may raise no more than $1 million every 12 months from that offering or any other offering.  In other words, if an issuer uses equity crowdfunding, it may not float any other kind of offering to raise additional funds until a year has passed.

There will also be strict limits on how much an investor whose net worth is less than $100,000 can spend, which will be the greater of $2,000 or 5% of his income.  There is still a maximum investment size of $100,000.

The issuer will have to provide additional information to the SEC, depending on the amount of money to be raised.  If its goal is, for example, $500,000 or more, audited financials will be required.

Implications for Issuers

Accredited crowdfunding under Rule 506 will provide new ways for small businesses to attract investors; with luck, they will help them grow more quickly and easily than before.  But the rules are complicated, and a failure to understand them could result in securities laws violations.  For issuers seeking to go public, both crowdfunding and Rule 506(c) ease the burden of obtaining the shareholder base required by FINRA for a ticker symbol assignment.  Companies should seek advice from an qualified securities attorney before embarking upon the unknown.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956.  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates Law Group, P.A.
Securities & Going Public Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855