US Securities and Exchange Commission (SEC) finalizes rules for Crowdfunding

US Securities and Exchange Commission (SEC) finalizes rules for Crowdfunding
US Securities and Exchange Commission (SEC) finalizes rules for Crowdfunding

Silicon Valley

From May 16, 2016, startups will have a new way to raise funds for their ventures – Crowdfunding. The SEC allows companies to raise up to $1 million in each 12-month period. Hitherto, it was possible for startups to raise funds from crowdfunding websites such as IndieGoGo and Kickstarter and this ruling from SEC formalizes this effort, allowing new players to come up with Crowdfunding sites.

All crowdfunding transactions must be completed through a registered funding portal or broker. The regulation imposes certain restrictions on the activities of Issuers and funding portals in furtherance of the protection of investors in crowdfunding arrangements, some of which are described here.

Funding portals are obligated to:

  • Be registered with the SEC and with the Financial Industry Regulatory Authority (FINRA).

  • Require investors to review certain educational materials prior to each investment commitment and have each investor affirm that he or she is risking the loss of the entire investment.

  • Make each investor answer questions demonstrating an understanding of risks generally applicable to investment in startups as the SEC deems appropriate.

Issuers are obligated to:

  • Make available an offering statement to investors through the SEC’s EDGAR website before each crowdfunding transaction, including a description of its business and financial condition, intended use of proceeds, and its ownership and capital structure.

  • Provide financial statements as part of its offering statement, which will need to be reviewed by an independent accountant if, inclusive of the current crowdfunding transaction, the Issuer has sold or will sell more than $100,000 of its securities in reliance on Regulation Crowdfunding in the last 12 months (or, if such amount exceeds $500,000, the financial statements must be audited (subject to an exception for first-time Issuers)).

  • Not advertise the crowdfunding offering other than through notices that direct investors to the funding portal or broker. The notice may include a brief description of the business of the Issuer and information such as the nature of the securities and the closing date of the offering period. For example, an Issuer would be able to note on its website or social media account that it is conducting an offering and direct readers to the funding portal.

  • Satisfy ongoing reporting requirements by filing an annual report with the SEC no later than 120 days after the end of the fiscal year covered by the report and to post the annual report on its website. The annual report will need to include the same type of information required in the offering statement except that offering-specific information will not be required. Furthermore, the Issuer need only have its principal executive officer certify that its financial statements are true and complete but need not file independently audited or reviewed financial statements unless it has already prepared such statements for other purposes. The ongoing reporting obligation continues until the earliest of the following: i) the Issuer has filed at least one annual report and has fewer than 300 holders of record, ii) the Issuer has filed at least three annual reports and has total assets that do not exceed $10 million, or iii) the Issuer or another party purchases all of the securities issued in reliance on Regulation Crowdfunding. Also, the annual reporting obligations terminate should the Issuer liquidate or becomes a reporting company under the Exchange Act (e.g., such as by listing on the New York Stock Exchange).


The complete SEC publication on Regulation Crowdfunding can be accessed here.

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