Citing the crisis raised by COVID-19, on May 5, 2020, the Securities and Exchange Commission (SEC) eased some of the requirements of Regulation Crowdfunding (CF), which allows small issuers to raise investment funds of up to $1.07 million as further described below. The changes relate to the timing of when the offering can happen and when financial statements are required to be included in the issuer’s offering materials.
WHAT IS REGULATION CF?
First passed in 2015, Regulation CF allows startups and small businesses to raise up to $1.07 million online in any trailing 12-month period from both accredited and non-accredited investors through an SEC-registered intermediary (either a funding portal or broker-dealer). An issuer that raises investor funds through Regulation CF is required to file a Form C with the SEC and post online business and financial disclosures about the issuer, including about its operations and management. Unlike some other security law exemptions, Regulation CF does not contain the ban on advertising and general solicitation, making it an attractive tool for startups and small companies. In other words, issuers can raise funds through Regulation CF by advertising their offerings to virtually anybody through the Internet.
SUMMARY OF THE TEMPORARY RULES
The temporary rules are intended to facilitate the ability of smaller, previously established companies that are directly or indirectly affected by COVID-19 to raise needed funds. Under these temporary rules, the issuer can assess interest in a Regulation CF offering before preparing the full set of offering materials. Once launched, the offering may be closed more easily and quickly, thus providing access to capital for the issuer. The temporary rules also ease certain financial statement review requirements for issuers offering more than $107,000 but not more than $250,000 in reliance on Regulation CF. The SEC press release providing a summary of the current rules and the temporary amendments is AVAILABLE HERE.
FUTURE CHANGES TO REGULATION CF
Please check in with us about future changes to Regulation CF and other SEC rules as this is a changing area of law. Among the proposed changes, the SEC is considering increasing the Regulation CF annual funding cap from its current $1.07 million to $5 million (as well as increasing the funding cap for Regulation A+ (Tier 2) to $75 million and for Rule 504 of Regulation D for up to $10 million).
The current securities laws and rules have developed over time in response to various changing market demands and competing interests. As such, there is a lot of inconsistency and some gray areas. These updates and proposals are part of a broader examination by the SEC intending to harmonize the convoluted regulatory landscape for private placements, hopefully providing more clarity for entrepreneurs who wish to raise investor funds.
To discuss the above topic, please contact Ara Babaian at firstname.lastname@example.org, or any other Encore Law attorney.