Learn How Crowdfunding Helps Companies Grow

December 3rd, 2013 | Author:

By Lamar Whitman

Interest in crowdfunding continues to grow as the Securities and Exchange Commission (SEC) recently issued proposed regulations to guide companies and investors. While “the JOBS Act” required the SEC to issue final regulations for crowdfunding within 270 days of passage, many suggested that the deadline was ambitious. About nine months after the original deadline, the proposed regulations have been released and actual implementation of this law has taken a large step forward.

Crowdfunding will permit companies to raise up to $1 million during a 12-month period under streamlined SEC reporting requirements. The JOBS Act, enacted in 2012, created a securities law exemption making it easier and less costly for companies to raise funds from a broader group of investors through Internet-funding portals.

Prior to issuance of the proposed regulations, there had been concern that the SEC might actually stifle crowdfunding efforts by requiring investors to disclose financial information in order to prove their status as qualified investors. The thought was that investors would balk at turning over detailed financial information, such as a tax return, to companies seeking investment. Fortunately, the recently-issued proposed regulations make it clear that that investors can certify their eligibility to companies without supplying financial or tax records.

In order to protect investors, Congress placed limits on how much an individual can invest during a 12-month period in crowdfunding offerings:

  • Individuals having income or net worth below $100,000 are limited to the lesser of $2,000 or of 5 percent of income.
  • Individuals having income or net worth of $100,000 or more are limited to the lesser of $100,000 or of 10 percent of income.

The net worth calculation does not include the investor’s personal residence, but the income calculation can include income of the investor’s spouse.

Clearly, crowdfunding costs will be less than other modes of SEC-regulated offerings, but will not be cost-free. For example, companies seeking investment of $100,000 to $500,000 must have their financial statements reviewed by an auditor. Companies seeking to raise over $500,000 and up to the $1 million limitation must have their financials audited. However, those, companies seeking less than $100,000 need only have financials certified by their CEO.

Another cost will flow from the requirement that crowdfunding be conducted through a broker or funding portal. A funding portal is a website designed to be a one-stop source of information concerning the offering, i.e., a go-between for the investor and company raising funds. Each company will select a single portal for the offering; that is, a company would not be able to list an offering at various sites.

The proposed regulations do contain a strict prohibition against advertising the offering. However, this does not prohibit the company from publicizing the basic facts of the offering, such as:

  • Identification of the issuer and its business.
  • A statement that issuer is seeking to raise capital.
  • A summary description of the offering and its terms.
  • Information directing investors to the funding portal.

So, while advertising is not permitted, companies will be allowed to provide the basic facts of the offering, allowing investors to make a more informed decision.

In announcing the proposed regulations, the SEC has set out a 90-day comment period that will end in late January 2014. After the comment period expires, the SEC will then determine whether to amend or adopt the proposed regulations as final. Once these regulations are made final, crowdfunding will come online.

Crowdfunding will provide a new source of capital for many promising startup companies, as well as opening up new investment opportunities for small investors. We believe this is an important event for the tech community, which will provide the capital to create new jobs and improved products and technologies, which in turn will grow the American economy.

On November 6, CompTIA hosted a webinar on crowdfunding to inform the tech community on the status and next steps for crowdfunding, which is available on demand here.

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Lamar Whitman is director of public advocacy for CompTIA.

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