With the passing of the JOBS ACT in 2012, the SEC changed how capital is raised by allowing companies to use the Internet and social media to sell securities via general solicitation. Equity crowdfunding under these new regulations is used to facilitate financing online that has changed how capital is raised forever. Below is a brief overview of the new rules that permit selling securities online. OMINEX fully supports all of these new regulations:
Regulation D provides the most common regulatory exemption used by crowdfunding portals today. It exempts private placement offerings under 506(c), which was adopted on September 23, 2013. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money from the general public using advertising, but can only sell to accredited investors (Reg. D 506b can have a max of 35 unaccredited investors per offering).
Regulation A+ exempts a securities offering that does not exceed $20 million from SEC registration if certain requirements are met. However, businesses still must file an offering statement that includes an offering circular and financial statements with SEC, and SEC staff review filings for consistency with applicable rules and accounting standards.
Regulation A+ offers two tiers of offerings: the first tier for offerings of up to $20 million and the second tier for offerings of up to $50 million, each within a 12-month period.
Pros: The new regulation lets Issuers:
For a lot more information, see the SEC website here.
Regulation CF (“Reg CF”) was approved on October 30, 2015, allowing anyone in the U.S. to invest in companies over the internet using regulated crowdfunding. Previously, private companies were generally allowed to solicit only accredited investors – those with a net worth of at least $1 million, excluding the value of their homes, or annual income of $200,000. These rules went into effect on May 16, 2016.
The JOBS Act is intended to help provide businesses with capital by making relatively low dollar offerings of securities and investments less costly. Congress included a number of provisions intended to protect investors who engage in these transactions, including investment limits, required disclosures by issuers, and a requirement to use regulated intermediaries.
Offerings under the new legislation can be made either via existing broker-dealers, or via a new class of regulated registrants called “funding portals.” These portals have to provide enough information for investors to make an educated decision on the investment, as well as conduct background checks on issuers, their owners, and their officers to reduce fraud risk. They also must make issuer information available on their portals for at least 21 days before securities can be sold, and enable conversations “among the crowd” about each offering in addition to having the option of a question-and-answer format.
Equity crowdfunding triggers the application of the federal securities laws because it involves the offer and sale of a security. Under the Securities Act of 1933 (“Securities Act”), the offer and sale of securities is required to be registered unless an exemption is available. Registered offerings are generally not feasible for raising smaller amounts of capital, as is done in a typical crowdfunding transaction, because of the high costs of conducting a registered offering and the resulting ongoing reporting obligations under the Securities Exchange Act of 1934 (“Exchange Act”) that may arise as a result of the offering.
Regulation CF added new Securities Act Section 4(a)(6), which provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions. To qualify for the exemption under Section 4(a)(6), crowdfunding transactions by an issuer must meet specified requirements, including the following:
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