Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers
May 13, 2016 (with April 5, 2017 updates to reflect inflation adjustments to the dollar amount thresholds)
Table of Contents
This compliance guide is divided into the following parts:
- Requirements of Regulation Crowdfunding
- Issuer Disclosure
- Limits on Advertising and Promoters
- Restrictions on Resales
- Exemption from Section 12(g)
- Bad Actor Disqualification
- Other Resources
- Contacting the SEC Staff
Under the Securities Act of 1933, the offer and sale of securities must be registered unless an exemption from registration is available. Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 added Securities Act Section 4(a)(6) that provides an exemption from registration for certain crowdfunding transactions. In 2015, the Commission adopted Regulation Crowdfunding to implement the requirements of Title III. Under the rules, eligible companies will be allowed to raise capital using Regulation Crowdfunding starting May 16, 2016.
In order to rely on the Regulation Crowdfunding exemption, certain requirements must be met.
a. Maximum Offering Amount of $1,070,000
A company issuing securities in reliance on Regulation Crowdfunding (an “issuer”) is permitted to raise a maximum aggregate amount of $1,070,000 in a 12-month period. In determining the amount that may be sold in a particular offering, an issuer should count:
- the amount it has already sold (including amounts sold by entities controlled by, or under common control with, the issuer, as well as any amounts sold by any predecessor of the issuer) in reliance on Regulation Crowdfunding during the 12-month period preceding the expected date of sale, plus
- the amount the issuer intends to raise in reliance on Regulation Crowdfunding in this offering.
An issuer does not aggregate amounts sold in other exempt (non-crowdfunding) offerings during the preceding 12-month period for purposes of determining the amount that may be sold in a particular Regulation Crowdfunding offering.
b. Investors Subject to Limits
Individual investors are limited in the amounts they are allowed to invest in all Regulation Crowdfunding offerings over the course of a 12-month period:
- 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 percent 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.
- During the 12-month period, the aggregate amount of securities sold to an investor through all Regulation Crowdfunding offerings may not exceed $107,000, regardless of the investor’s annual income or net worth.
Spouses are allowed to calculate their net worth and annual income jointly. This chart illustrates a few examples of the investment limits:
Greater of $2,200 or 5% of $30,000 ($1,500)
Greater of $2,200 or 5% of $80,000 ($4,000)
10% of $107,000 ($10,700)
10% of $200,000 ($20,000)
10% of $1,200,000 ($120,000), subject to $107,000 cap
c. Transactions Conducted Through an Intermediary
Each Regulation Crowdfunding offering must be exclusively conducted through one online platform. The intermediary operating the platform must be a broker-dealer or a funding portal that is registered with the SEC and FINRA.
Issuers may rely on the efforts of the intermediary to determine that the aggregate amount of securities purchased by an investor does not cause the investor to exceed the investment limits, so long as the issuer does not have knowledge that the investor would exceed the investment limits as a result of purchasing securities in the issuer’s offering.
Certain companies are not eligible to use the Regulation Crowdfunding 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; and
- 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.
a. Form C
Any issuer conducting a Regulation Crowdfunding offering must electronically file its offering statement on Form C through the Commission’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system and with the intermediary facilitating the crowdfunding offering. A Form C cover page will be generated when the issuer provides information in XML-based fillable text boxes on the EDGAR system. Other required disclosure that is not requested in the XML text boxes must be filed as attachments to Form C. There is not a specific presentation format required for the attachments to Form C; however, the form does include an optional “Question and Answer” format that issuers may use to provide the disclosures that are required but not included in the XML portion.
b. Offering Statement Disclosure
The instructions to Form C indicate the information that an issuer must disclose, including:
- information about officers, directors, and owners of 20 percent or more of the issuer;
- a description of the issuer’s business and the use of proceeds from the offering;
- the price to the public of the securities or the method for determining the price,
- the target offering amount and the deadline to reach the target offering amount,
- whether the issuer will accept investments in excess of the target offering amount;
- certain related-party transactions; and
- a discussion of the issuer’s financial condition and financial statements.
The financial statements requirements are based on the amount offered and sold in reliance on Regulation Crowdfunding within the preceding 12-month period:
- For issuers offering $107,000 or less: Financial statements of the issuer and certain information from the issuer’s federal income tax returns, both certified by the principal executive officer. If, however, financial statements of the issuer are available that have either been reviewed or audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and will not need to include the information reported on the federal income tax returns or the certification of the principal executive officer.
- Issuers offering more than $107,000 but not more than $535,000: Financial statements reviewed by a public accountant that is independent of the issuer. If, however, financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and will not need to include the reviewed financial statements.
- Issuers offering more than $535,000:
- For first-time Regulation Crowdfunding issuers: Financial statements reviewed by a public accountant that is independent of the issuer, unless financial statements of the issuer are available that have been audited by an independent auditor.
- For issuers that have previously sold securities in reliance on Regulation Crowdfunding: Financial statements audited by a public accountant that is independent of the issuer.
c. Amendments to Offering Statement
For any offering that has not yet been completed or terminated, an issuer can file on Form C/A an amendment to its offering statement to disclose changes, additions or updates to information. An amendment is required for changes, additions or updates that are material, and in those required instances the issuer must reconfirm outstanding investment commitments within 5 business days, or the investor’s commitment will be considered cancelled.
d. Progress Updates
An issuer must provide an update on its progress toward meeting the target offering amount within 5 business days after reaching 50% and 100% of its target offering amount. These updates will be filed on Form C-U. If the issuer will accept proceeds over the target offering amount, it also must file a final Form C-U reflecting the total amount of securities sold in the offering. If, however, the intermediary provides frequent updates on its platform regarding the progress of the issuer in meeting the target offering amount, then the issuer will need to file only a final Form C-U to disclose the total amount of securities sold in the offering.
e. Annual Reports
An issuer that sold securities in a Regulation Crowdfunding offering is required to provide an annual report on Form C-AR no later than 120 days after the end of its fiscal year. The report must be filed on EDGAR and posted on the issuer’s website. The annual report requires information similar to what is required in the offering statement, although neither an audit nor a review of the financial statements is required. Issuers must comply with the annual reporting requirement until one of the following occurs:
- (1) the issuer is required to file reports under Exchange Act Sections 13(a) or 15(d);
- (2) the issuer has filed at least one annual report and has fewer than 300 holders of record;
- (3) the issuer has filed at least three annual reports and has total assets that do not exceed $10 million;
- (4) the issuer or another party purchases or repurchases all of the securities issued pursuant to Regulation Crowdfunding, including any payment in full of debt securities or any complete redemption of redeemable securities; or
- (5) the issuer liquidates or dissolves in accordance with state law.
Any issuer terminating its annual reporting obligations is required to file notice on Form C-TR reporting that it will no longer provide annual reports pursuant to the requirements of Regulation Crowdfunding.
An issuer may not advertise the terms of a Regulation Crowdfunding offering except in a notice that directs investors to the intermediary’s platform and includes no more than the following information:
- (a) a statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act, the name of the intermediary through which the offering is being conducted, and a link directing the potential investor to the intermediary’s platform;
- (b)the terms of the offering, which means the amount of securities offered, the nature of the securities, the price of the securities, and the closing date of the offering period; and
- (c)factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number, and website of the issuer, the e-mail address of a representative of the issuer, and a brief description of the business of the issuer.
Although advertising the terms of the offering off of the intermediary’s platform is limited to a brief notice, an issuer may communicate with investors and potential investors about the terms of the offering through communication channels provided on the intermediary’s platform. An issuer must identify itself as the issuer and persons acting on behalf of the issuer must identify their affiliation with the issuer in all communications on the intermediary’s platform.
An issuer is allowed to compensate others to promote its crowdfunding offerings through communication channels provided by an intermediary, but only if the issuer takes reasonable steps to ensure that the promoter clearly discloses the compensation with each communication.
Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year, unless the securities are transferred:
- (1) to the issuer of the securities;
- (2) to an “accredited investor”;
- (3) as part of an offering registered with the Commission; or
- (4) to a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance.
Section 12(g) of the Exchange Act requires an issuer with total assets of more than $10 million and a class of securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, to register that class of securities with the Commission. However, securities issued pursuant to Regulation Crowdfunding are conditionally exempted from the record holder count under Section 12(g) if the following conditions are met:
- the issuer is current in its ongoing annual reports required pursuant to Regulation Crowdfunding;
- has total assets as of the end of its last fiscal year of $25 million or less; and
- has engaged the services of a transfer agent registered with the SEC.
As a result, Section 12(g) registration is required if an issuer has, on the last day of its fiscal year, total assets greater than $25 million and the class of equity securities is held by more than 2,000 persons, or 500 persons who are not accredited investors. In that circumstance, an issuer is granted a two-year transition period before it is required to register its class of securities pursuant to Section 12(g), so long as it timely files all of the annual reports required by Regulation Crowdfunding during such period.
An issuer seeking to exclude a person from the record holder count of Section 12(g) is responsible for demonstrating that the securities held by the person were initially issued in an offering made under Section 4(a)(6).
Rule 503 of Regulation Crowdfunding includes “bad actor” disqualification provisions that disqualify offerings if the issuer or other “covered persons” have experienced a disqualifying event, such as being convicted of, or subject to court or administrative sanctions for, securities fraud or other violations of specified laws.
a. Covered Persons
Understanding the categories of persons that are covered by Rule 503 is important because issuers are required to conduct a factual inquiry to determine whether any covered person has had a disqualifying event, and the existence of such an event will generally disqualify the offering from reliance on Regulation Crowdfunding.
“Covered persons” include:
- the issuer, including its predecessors and affiliated issuers;
- directors, officers, general partners or managing members of the issuer;
- beneficial owners of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
- promoters connected with the issuer in any capacity at time of sale; and
- persons compensated for soliciting investors, including the general partners, directors, officers or managing members of any such solicitor.
b. Disqualifying Events
Under the final rule, disqualifying events include:
- Certain criminal convictions;
- Certain court injunctions and restraining orders;
- Certain final orders of certain state and federal regulators;
- Certain SEC disciplinary orders;
- Certain SEC cease-and-desist orders;
- Suspension or expulsion from membership in a self-regulatory organization (SRO), such as FINRA, or being barred from association with an SRO member;
- SEC stop orders and orders suspending the Regulation A exemption; and
- U.S. Postal Service false representation orders.
Many disqualifying events include a look-back period (for example, a court injunction that was issued within the last five years or a regulatory order that was issued within the last ten years). The look-back period is measured from the date of the disqualifying event – for example, the issuance of the injunction or regulatory order and not the date of the underlying conduct that led to the disqualifying event – to the date of the filing of an offering statement.
Disqualification will not arise as a result of disqualifying events relating to any conviction, order, judgment, decree, suspension, expulsion or bar that occurred before May 16, 2016, the effective date of Regulation Crowdfunding. Matters that existed before the effective date of Regulation Crowdfunding, are still within the relevant look-back period, and would otherwise be disqualifying are, however, required to be disclosed in the issuer’s offering statement.
c. Exceptions and Waivers
Regulation Crowdfunding provides an exception from disqualification when the issuer is able to demonstrate that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering.
The steps an issuer should take to exercise reasonable care will vary according to particular facts and circumstances. An instruction to the rule states that an issuer will not be able to establish that it has exercised reasonable care unless it has made, in light of the circumstances, factual inquiry into whether any disqualifications exist.
Disqualification will not arise if, before the filing of the offering statement, the court or regulatory authority that entered the relevant order, judgment or decree advises in writing – whether in the relevant judgment, order or decree or separately to the Commission or its staff – that disqualification under Regulation Crowdfunding should not arise as a consequence of such order, judgment or decree.
Regulation Crowdfunding also provides for the ability to seek waivers from disqualification by the Commission upon a showing of good cause that it is not necessary under the circumstances that the exemption be denied.
The adopting release Regulation Crowdfunding can be found on the SEC’s website at http://www.sec.gov/rules/final/2015/33-9974.pdf.
Regulation Crowdfunding (17 CFR 227.100 et seq.) can be accessed through the “Corporation Finance” section of the SEC’s website at http://www.sec.gov/divisions/corpfin/ecfrlinks.shtml.
You can also submit complaints or tips about possible securities laws violations on the SEC’s questions and complaints page at http://www.sec.gov/complaint.shtml.
The SEC staff is happy to assist with questions regarding Regulation Crowdfunding. For issuer questions, you may contact the Division of Corporation Finance's Office of Small Business Policy using this online request form at or by telephone at (202) 551-3460. For intermediary questions, you may contact the Division of Trading and Markets, Office of Chief Counsel, at (202) 551-5777, or search for your answer in the Small Business Compliance Guide for Intermediaries.