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All About Securities Offerings Under Regulation Crowdfunding

Want to know everything there is to know about Regulation Crowdfunding? Keep reading!

1. Crowdfunding Background

The Securities Act of 1933 outlines the regulations for selling equity securities in the U.S., with the Initial Public Offering (IPO) being a notable example, registered under section 5 of the Securities Act and Regulation S-K. However, IPOs are often costly and time-consuming, requiring extensive regulatory compliance.

Companies seeking to avoid the complexities of registered offerings may choose exempt offerings, which have fewer regulations and varying disclosure requirements. Regulation Crowdfunding, introduced by the JOBS Act of 2012, is one such exempt offering that has become popular for raising capital.

This approach offers startups a cost-effective and faster alternative to traditional offerings. The global crowdfunding market, valued at $1.25 billion in 2022, is expected to grow significantly by 2030 due to its accessibility and lower compliance costs.

2. Key Aspects

Regulation Crowdfunding democratizes equity financing, enabling startups and small businesses to raise capital through public participation, previously dominated by accredited investors. It allows for a maximum raise of $5 million within a 12-month period, sets eligibility criteria for issuers, and imposes investor purchasing limits based on their financial status.

The regulation requires detailed disclosures via an Offering Statement on Form C and mandates ongoing reporting to ensure transparency and informed investment decisions. This balance between capital access and investor protection is crucial for sustainable crowdfunding.

3. Timeline

Launching a crowdfunding campaign typically takes around six weeks, from planning to SEC filing, assuming the company’s financials are ready and necessary audits or reviews are completed promptly. This timeline can vary depending on business complexity, the efficiency of the chosen crowdfunding platform, and the extent of marketing and preparation efforts.

4. Cost

Several factors influence the cost of a crowdfunding campaign:

– Accounting and Legal Costs: Reviewing financial statements costs between $2,500 and $10,000, while audits can range from $10,000 to $30,000. Legal expenses for preparing Form C and related documents typically range from $5,000 to $35,000, depending on the offering’s complexity.

– Intermediary Commissions and Marketing Fees: Intermediaries usually take a 5-7% commission of the total raised amount, with some requiring an equity fee. Marketing costs for video production, social media, and public relations vary widely.

– Additional Fees: State securities law filing fees are generally minor. Ongoing reporting costs, including annual reports and amendments, range from $3,000 to $10,000 annually, depending on business complexity. Other expenses include insurance, technology, and platform fees.

5. Eligibility

To qualify for the Crowdfunding exemption from the Securities Act’s registration requirements, issuers must meet four criteria:

– Maximum Offering Amount: Up to $5 million can be raised in a 12-month period.

– Investor Purchasing Limits: No limits for accredited investors. Non-accredited investors can invest based on their annual income or net worth, with specific caps.

–  Intermediary Involvement: Offerings must be conducted through a single, registered intermediary that complies with SEC and FINRA regulations.

– Issuer Eligibility: Certain companies, such as non-U.S. companies, Exchange Act reporting companies, and those with bad actors or delinquent in reporting, are excluded.

6. Completing and Filing Form C

Form C is vital for launching a Crowdfunding Offering, serving as a compliance and disclosure document for investors. It includes basic issuer information and detailed disclosures required by Regulation Crowdfunding. Specific disclosures on Form C encompass:

– Issuer and intermediary details
– Offering details, including securities type, pricing, and target amount
– Financial information providing insights into the issuer’s financial health

7. Parts of the Offering Statement

The Offering Statement on Form C includes comprehensive issuer details:

– Organizational information
– Business risks
– Biographies of directors and officers
– Principal security holders
– Extensive business, market, and operational disclosures
– Planned use of offering proceeds

Financial compliance is ensured through required historical financial statements, varying in detail based on the offering size.

8. Ongoing Reporting Requirements

Regulation Crowdfunding mandates minimal yet essential ongoing reporting. Issuers must file annual reports within 120 days of the fiscal year-end via Form C-AR, updating the initial offering statement, including financials and operational details. Material changes must be reported using Form C-AR/A or C/A, and a termination report via Form C-TR is required when ending reporting obligations under specific conditions.

9. Advertising / Marketing

Direct advertising of offering terms is restricted, except for basic tombstone notices. Pre-filing communications to gauge investor interest are allowed if they clarify that no commitments can be made until the offering is officially opened. Promotional activities must be transparent and not misleading.

10. Resale Restrictions

Securities acquired through Regulation Crowdfunding have a 12-month lock-up period, restricting resale except under specific conditions, such as sales to the issuer, accredited investors, or family members under specific circumstances. This ensures controlled trading environments while providing some liquidity avenues.

11. Co-Issuer Offerings

Rule 3a-9, introduced in 2020, allows co-issuer offerings under Regulation Crowdfunding, involving an Operating Company and a Crowdfunding Vehicle. This structure facilitates capital raising while ensuring compliance and transparency.

12. Importance of Exchange Act Section 12(g) for Crowdfunding Issuers

Section 12(g) of the Exchange Act requires issuers to register a class of securities with the SEC when assets exceed $10 million and securities are held by more than 2,000 persons or 500 non-accredited investors. Crowdfunding issuers must manage their “Held of Record” count to avoid crossing these thresholds and triggering continuous reporting requirements.

Securities issued under Regulation Crowdfunding are exempt from the count if the issuer meets specific conditions, allowing time to adjust before needing to register under Section 12(g).

Regulation Crowdfunding offers startups and small businesses a way to raise capital from a broader audience, not just accredited investors. The future of this fundraising method depends on creating a system that encourages innovation and growth while providing accessible investment opportunities.

Download the white paper from Bevilaqua PLLC for more detailed information and a great read on the essence of equity crowdfunding.