New Crowdfunding Rules for Small Businesses
The SEC has recently clarified the securities rules regarding crowdfunding making it easier for small businesses to raise capital through a crowdfunding project. This year there is expected to be a gold rush into the crowdfunding space, giving small business owners another path to raising the needed capital to expand. Before you jump into the rush with your business, understand the new rules for crowdfunding for small businesses.
$1 Million Dollar Cap
Small businesses are allowed to raise up to $1 million a year through crowdfunding without becoming subjected to SEC publicly traded securities regulations. This million dollar cap per year counts for any and all crowdfunding projects for the year, so if you use multiple portals and multiple projects they will all count towards the same million dollar cap.
Investor caps
Investors using crowdfunding to invest in projects will be subjected to an annual cap of 10% of their annual income or net worth for those with incomes over $100,000 or the greater of $2,000 or 5% of annual income or net worth for those with incomes less than $100,000. This is a relaxed version of the accredited investor rules for other securities offerings. This allows a greater pool of possible investors but businesses and crowdfunding portals will need to continue doing due diligence to qualify investors.
Registered Portals
The new crowdfunding rules will only apply to small businesses who crowdfund through approved and registered portals or through a registered broker-dealer. These broker-dealers and portals will not be allowed to solicit investments, offer investment advice to investors, or compensate employees based on sales. Be sure to check with any crowdfunding portal to ensure that they are registered and the new rules apply to any project under their portal.
Audited Financials
Small businesses seeking more than $500,000 will still be required to release audited financial statements to the SEC. These audits will need to be filed on time, using GAAP accounting, and approved by a CPA. This could become an onerous requirement for small businesses who are not careful to track their financials and release dates carefully.
Annual Reports
Any small business who uses crowdfunding to raise capital will be required to file annual reports with the SEC. This annual report will need to include: income tax returns to both investors and the SEC, disclosure information for directors, officers, and investors with more than 20% of the business, information about the price and risk of the investment, and any related party transactions. These reports are similar to the annual filings of publicly traded companies. Be sure to factor in the cost of creating and ongoing filings to any crowdfunding project.
These are just a few of the highlights of the new crowdfunding rules for small businesses promulgated under the 2012 JOBS Act. Be sure to consult with an attorney before raising any capital through investors, whether through a crowdfunding portal or not. Penalties and fines for illegally traded securities can be devastating to any small business. If you would like to discuss your future crowdfunding project, call Reidel Law Firm at (832)510-3292 or use the form below.
