5 Things You Need to Know Before You Start Crowdfunding
It’s becoming a popular practice; crowdfunding is on the rise, but the up and coming form of fundraising has rules and regulations that aren’t so familiar. Crowdfunding lets companies raise money through many small investments by a large group of people, the general public.
Back in 2016 the SEC set regulation on crowdfunding, giving U.S. companies a framework to solicit and receive funds from the general public. Those rules are called, Regulation Crowdfunding. The regulations have two objectives, creating some order to the crowdfunding chaos and protecting investors from possible fraud.
Here’s what you need to know before you start or invest in a campaign.
1. There are Limitations
For the Investor: If either of an investor’s annual income or net worth is less than $107,000, then the investor’s investment limit is the greater of:
- $2,200 or
- 5% of the lesser of the investor’s annual income or net worth.
If both annual income and net worth are equal to or more than $107,000, then the investor’s limit is 10 percent of the lesser of their annual income or net worth.
For the Company: Companies are limited to raising $1M across all crowdfunding platforms during a 12- month period. Anything over that and the company must register its securities.
2. Intermediary Transaction
Crowdfunding must be exclusively conducted through one online platform. According to the regulations, “the intermediary operating the platform must be a broker-dealer or a funding portal that is registered with the SEC and FINRA.”
Companies who choose to use crowdfunding are now under obligations that include update requirement, disclosure agreements, and must meet certain timetables.
Here are some of the main points a company must disclose:
- The target offering amount and deadline to reach that amount
- An update on the company’s finances
- Audited (or reviewed) financial statements
- A description of how the company will use the crowdsourced funds
- Information about owners who hold more than 20% of the company
4. Missed Goals
What happens if a company does not meet its crowdfunding goal? Under these new rules the company does not get to keep any of the money raised. They will also lose the initial costs.
5. Company Eligibility
According to Regulation Crowdfunding certain companies are not eligible to use the exemption. These include:
- non-U.S. companies
- companies that already are Exchange Act reporting companies
- certain investment companies
- companies that are disqualified under Regulation Crowdfunding’s disqualification rules
- companies that have failed to comply with the annual reporting requirements
- under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement
- companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies
These are some of the key points of the SEC regulations regarding crowdfunding. You can view all of the regulations for here.