On October 30, 2015, the United States Securities and Exchange Commission ("SEC") moved forward in implementing Title III of the JOBS Act and adopted new rules permitting companies to offer and sell securities to all potential investors through crowdfunding. Crowdfunding is the use of small amounts of capital from a large number of investors to finance new business ventures. This method of investment, typically conducted over the internet, is aimed at assisting smaller companies with capital formation by accessing a greater pool of potential investors. The SEC had previously opened crowdfunding investment to "accredited investors" (investors meeting certain net worth and/or investment experience criteria) but these rules permit non-accredited investors,i.e., everyone else, to participate while providing them with additional protection under the federal securities laws. Title III and these rules come in response to the enormous growth of equity crowdfunding through financing platforms such as GoFundMe, Kickstarter or Indiegogo.
Specifically, the Crowdfunding Regulation rules would:
- Permit a company to raise up to $1 million in any 12 month period through crowdfunding offerings;
- Permit individual investors, over a
12 month period, to invest across all crowdfunding offerings up
- $2,000 or 5% of their annual income or net worth, whichever is less, for individuals with annual income or net worth below $100,000, or
- 10% of their annual income or net worth, whichever is less, for individuals with annual income or net worth greater than or equal to $100,000; and,
- Cap the aggregate amount of securities sold to an investor through all crowdfunding offerings at $100,000.
The rules also exempt companies raising less than $1 million a year from providing financial statements audited by an independent auditing firm. This removes a barrier to entry given the potential significant cost associated with audited financials. The new rules will take effect 180 days after they are published in the Federal Register.
Though there are many perceived benefits from these new rules, the reality is that many start-ups fail. As a result, we will likely see an uptick in securities related matters – brought by both the SEC, who will have the responsibility of policing this new marketplace of inexperienced investors, and private plaintiffs seeking to recover losses based on fraud. However, given the limited amount that can be invested and the cost of litigation, it is likely that most private investors will be deterred from filing suit and the SEC will likely bear the lion's share of the burden.
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