8 Things You May Not Know About the New Federal Crowdfunding Rules But Should Know

As many of you know, the S.E.C. adopted rules on October 30, 2015 under Title III of the 2012 JOBS Act (“Jump Start Our Businesses Act”) related to crowdfunding that allows issuing companies to raise capital from a crowd of investors based on their income and net worth. (Source: S.E.C. Press Release)

Usually when experts and others discuss these new federal crowdfunding rules, formally known as Regulation Crowdfunding, there is an emphasis on the great opportunity that is there for issuing companies. However, Regulation Crowdfunding is (1) new and therefore many unintended consequences unknown and (2) riddled with regulatory compliance requirements that only a knowledgeable securities attorney should undertake.  (See my previous blogs on this issue)

That being said, here is a non-exclusive list of the top 8 things I think that you, as an issuing company, SHOULD know about the new federal crowdfunding rules but may not know:

  1. Beware of the money you raised 12 months prior to your Regulation Crowdfunding raise. Warning! Math is involved! And if you are anything like me, you’d rather to leave the math to other people. But it’s important to note that non-crowdfunding offerings are NOT counted towards the $1MM maximum aggregate amount that issuers can raise but previous Regulation Crowdfunding offerings are counted towards that $1MM if you raise it within the preceding 12 months. This is an IMPORTANT distinction! Let’s take a look at an example or two: If a company raises $500,000 under a Regulation D exemption in the 12 months prior to raising capital under Regulation Crowdfunding, that $500,000 is not counted towards the maximum amount of $1MM that can be raised. However, if a company raises the same $500,000 within 12 months prior to a Regulation Crowdfunding raise, the issuing company can only raise $500,000 MAX in the 2nd Regulation Crowdfunding raise. Now in practice, since Regulation Crowdfunding is new, there is no issuing company that should run afoul of this provision for now. But for future reference, beware! (Source: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, published May 13, 2016, 2(a))
  2. The investors’ income AND net worth must be considered together. I’d like to take this time to apologize for the subsequent confusing rule; it’s almost as if the S.E.C. wants to complicate things. That being said, the rule is that if EITHER an investor’s annual income OR net worth is less than $100,000, then the investor’s investment limit is the GREATER of: $2,000 or 5% of the lesser of the investor’s annual income or net worth. Let’s say you have an investor that has an annual income of $97,000 but a net worth of $5 MM. They can only invest the greater of $2,000 or 5% of the lesser of the investor’s annual income of net worth. BOTH the net worth of the investor AND the annual income must be over $100,000 in order to qualify for the higher investment limits according to the rule. It’s not enough that either one is over $100,000. That’s a tricky distinction and seems an awkward distinction at times, but its an important distinction. (Source: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, published May 13, 2016, 2(b))
  3. You need a specific business plan to qualify to use Regulation Crowdfunding and I have absolutely no idea what that looks like. The S.E.C. has not given guidance about what this business plan would need to include in order to be compliant with Regulation Crowdfunding. I imagine the reason that the S.E.C. placed this as a requirement is to make sure at least some level of thought has went into the business seeking to use Regulation Crowdfunding and so that investors would have some general information about the business in addition to the financial statements that are required to be provided to investors under Regulation Crowdfunding. It’s generally a good idea to have a business plan anyway whether its required under Regulation Crowdfunding or note. So get to writing! (Source: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, published May 13, 2016, 2 (d))
  4. Progress reports are required beyond the Initial Offering Statement Disclosure on form C. That’s right—after you have file form C (Initial Offering Statement) or form C/A (amendment to initial offering statement), there are more forms to file. It’s almost like grade school all over again. An issuer must provide an update on its progress toward meeting the target offering within five (5) business days after reaching 50% and 100% of its target offering on form C-U. The issuer only has to provide the final form C-U if the intermediary provides frequent updates on its platform. I am obviously biased but this is yet another reason why you should give the burden of keeping up with these little details to a knowledgeable team, including a knowledgeable securities attorney.  (Source: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, published May 13, 2016, 3(d))
  5. The S.E.C. has a hard time of letting go because there are annual reports required even AFTER the raise has been completed. That’s right. Even after an issuer has finished their raise, Regulation Crowdfunding requires that the issuer provide an annual report on Form C-AR no later than 120 days after the end of its fiscal year….each year. Now, there are 5 triggering events in which issuers are no longer required to do annual reporting; in which case they are to file a notice on Form C-TR terminating their reporting requirements. I’d advise marking calendars and giving this task to the head compliance officer. Remember that non-compliance with Regulation Crowdfunding or a violation can prevent an issuer from using it in the future so issuers want to make sure they are 100% compliant. (Source: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, published May 13, 2016, 3(e))
  6. You can’t go posting your offering terms on your social media page…and other things you cannot do online. Before you think that you can post your offering terms on your Facebook or LinkedIn page, get that vision out of your mind. An issuer cannot advertise terms of the Regulation Crowdfunding offering except for a notice that directs potential investors to the crowdfunding portal, the one portal that is required to be S.E.C. registered and FINRA certified. Once on the intermediary platform, the issuer is then allowed to communicate with investors and potential investors about the terms of the offering. I know it’s very tempting for issuers to get very excited and want to blast their offering out to the world, especially millennials like myself who live on social media, but seek legal counsel and craft a message that is intriguing but doesn’t violate the rules of Regulation Crowdfunding. (Source: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, published May 13, 2016, 4)
  7. Count your investors! That’s right—count them individually. Section 12(g) is the Exchange Act requires issuers with total assets or more than $10MM ($25MM if you are using Regulation Crowdfunding) AND a class of securities with more than 2,000 record holders or 500 who are not accredited to register with the S.E.C. (Code word for expensive and time consuming) There are 3 ways to PREVENT your investors from being counted towards those magic numbers if you are using a Regulation Crowdfunding exemption to raise capital. Make sure you meet those requirements because I ASSURE YOU—you don’t want to trigger registration requirements. You can shift that burden to your intermediary crowdfunding portal but as you can see from No. 8 below, you will need to do your due diligence to make sure the crowdfunding portal is doing what it needs to do to be compliant as well. (Source: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, published May 13, 2016, 6)
  8. Beware of bad people—and that includes a lot of people. One of the ways to get disqualified from using Regulation Crowdfunding is a “bad actor” disqualification from a “covered person” that experienced a “disqualifying event.” (I put those in all quotes because they all have very specific definitions.) You’d be surprised who is a “covered person” who can disqualify a company totally from using Regulation Crowdfunding. For example, the issuer including its predecessors and affiliated issuers, directors, officers and general partners, promoters, persons compensated for soliciting investors, and beneficial owners of 20% or more to name a few. So be careful who you invite on your team—one wrong move and they could disqualify you from using Regulation Crowdfunding now or in the future. The good thing is that no bad acts will be included in the look back period prior to May 16, 2016 and there are safe haven provisions. But don’t get sloppy—still do your homework on potential team members. (Source: Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, published May 13, 2016, 7)

As always, I encourage you seek knowledgeable counsel BEFORE you make the decision to do ANY private placement offering, but especially Regulation Crowdfunding since its a new and unchartered territory of securities law. Remember that the world of securities law is highly regulated and rule specific— it’s not an area of law to “play lawyer” in even for other lawyers who don’t have knowledge about this area.


I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practicehelping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private capital (including crowdfunding) that have a line item budgeted for legal services.We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so.  I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. View past and upcoming speaking engagements and request me to speak to your organization.

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