Real Crowdfinance Finally Becomes Legal … Soon

After 24 months of comment, review and consideration the Securities and Exchange Commission finally adopted the final rules relating to equity crowdfunding on October 30, 2015, by a 3-1 vote. My hopeful prediction that we were a “solid six months away…from crowdfunding becoming legal” was certainly optimistic. The long anticipated enactment adopts an exemption from securities registration for Internet based securities offerings. This will allow businesses to raise up to $1 million every 12 months in capital from regular ‘ol non-accredited investors … aka the “crowd”. These crowdfunding rules comprise the last major set of rules called for in Congress’ April 5, 2012, legislation. They are the rules for Title III of the JOBS Act.

The rules take effect 180 days after publication in the Federal Register – so we are looking at legal crowdfunding in May 2016.

In my October 23, 2013 post, SEC Proposes Crowdfunding Rules, I highlighted a few points of interest from the behemoth rules proposal totaling 585 pages. The final rules are even more complex in their 686 pages of analysis and rules. So to spare you the agony of a complete recap, I again take a 1,000 foot view instead of an in-depth analysis of the final crowdfunding rules.

  • Companies’ ability to advertise crowdfunding offering. An issuer can only advertise by directing potential investors to the funding portal. There is still no open season for social media.
  • Cancellation period. Investors may cancel their commitment up to 48 hours prior to the deadline identified in the offering materials.
  • Individual investment limitations and net worth calculations. The final rules clarify that the investment limit reflects the aggregate amount an investor may invest in all Regulation Crowdfunding offerings for a 12 month period from any issuer. A “lesser of” approach to determining which category applies to an investor’s maximum contribution based on net worth or annual income is adopted. As an example, an individual with a $50,000 salary and net worth of $105,000 can contribute up to $2,500 in a given 12 month period (or 5% of their annual salary, as it is less than their total net worth), as opposed to under the proposed rules where that investor could have contributed up to $10,500. An individual with an annual income of $150,000 and total net worth of $80,000 can only contribute up to $4,000 under the final rules, as opposed to $15,000 under the proposed rules.
  • Implementation of “Funding Portals”. Funding portals are seen as the “gatekeepers” that help to provide investor protection, according to SEC Commissioner Aguilar. FINRA published applicable rules for intermediaries prior to the SEC vote and was only waiting for the Commission to implement the crowdfunding rules. Unlike broker dealers, the funding portals cannot offer investment advice. The final rules generally remain the same as proposed here, except that the definition of “platform” was modified slightly to be more technical. Platform means “a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities.” The instruction that intermediaries can also engage in back office or other administrative functions was added to the final rules.
  • Audits are “out” for the most part. SEC Chair Mary Jo White stated in her opening statement that in considering comment letters, the final rules exempt first time issuers from having an audit requirement when raising money through equity based crowdfunding to reduce overall costs. If you read my 2013 post, you’ll know the proposed requirement that businesses raising in excess of $500,000 must prepare audited financial statements was disappointing. Others echoed this concern. The final rules only require first-time crowdfunding issuers submit reviewed financial statements when raising between $500,000 and $1,000,000. Additionally, Chair White said “issuers conducting smaller offerings would not be required to file tax returns, as proposed, but rather would be required to disclose specific information from the returns, which should address privacy concerns.” So an issuer won’t have to publicly disclose their entire tax return, but will need to disclose certain relevant information.
  • On-going audit requirement is also “out”. Most importantly, we were also successful in getting the SEC to avoid imposing an on-going reporting requirement that also required for issuers to undergo an audit in perpetuity. Annual reports simply need to be certified by an officer of the issuer.
  • Specific disclosures are mandated. The broad requirement regarding disclosure of any material information necessary to make the statements made was adopted as well as a requirement for disclosure of payments to an intermediary (disclosed as a dollar amount or percentage), location of the issuer’s website that has the issuer’s annual report and date of report availability, whether the issuer or any predecessor has failed to comply with ongoing reporting requirements under the crowdfunding rules. Financial disclosure requirements and contents vary depending on the size of the offering.
  • Intermediaries’ are able to hold financial interest. The final rules allow an intermediary to be compensated with a financial interest in issuers that conduct an offering on the intermediary’s funding portal, as long as it is disclosed to investors. The intermediary can only be compensated with the same type of security being offered to crowdfunding investors. This means no preferential treatment for the funding portal!
  • Ability to simultaneously conduct multiple offerings. The SEC provided clarification to conducting simultaneous offers pursuant to different exemptions and allows businesses to raise money via crowdfunding without that offering impacting a company’s ability to also pursue other forms of exempt capital raises (as long as it complies with requirements for each applicable exemption). In short, this isn’t an “either/or” proposition. Issuers can crowdfund and also raise money the old fashioned way.

So, the adopted final rules show some victories for us while also keeping certain less practical requirements in place (like the requirement that businesses publish their financial statement on their company website).

All in all, will issuers and investors flock to crowdfunding with all these complex rules? Probably not. But we can be optimistic that a handful of brave issuers will successfully prove that equity crowdfunding is an important part of not only a company capital structure, but also of a successful strategy to connect with the company’s customers.

* A special thanks to Amanda Salvione for her assistance. One person should never have to read 686 pages of anything from the SEC alone.

Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Reg A+ is here!!! But is it crowdfunding?

There has been a potentially game-changing development in the world of crowdfunding. The SEC, while unable for a host of reasons to approve rules governing Title III of the JOBS Act (which permits true crowdfunding), did approve the final rules for Title IV. When the SEC trotted out the proposed rules, all the interest groups – including state securities administrators – came out in full force. I am happy to report that the crowdfunding community won the day, in no small part to relentlessly educating the SEC staff that championed this change.

There is a seldom used exemption that allows for sales of securities called “Regulation A”. In recent years, less than 20 offerings a year were being conducted using this Regulation A. To try to jumpstart use of that exemption, Congress wrote legislation to legalize an enhanced Regulation A.

In the new rules, the SEC divides the new Regulation A into two tiers. Tier One is a basic rehash of the old unused exemption, which gives power to each individual state to approve or disapprove of an offering.

Tier Two is colloquially referred to as “Reg A+”. And it really provides a great opportunity for companies to begin raising money online. Reg A+ eliminates the various state securities agencies from reviewing the offering at all.

The highlights:

• A company can raise up to $50 million.
• The SEC has to approve the offering.
• The company, while raising money, has semi-annual reporting requirements.
• The company is required to have audited financial statements.
• Under certain circumstances, the company may exceed the 2,000 shareholder limitation without triggering public company reporting requirements.

• AND MOST IMPORTANTLY: these offerings are NOT limited to only accredited (rich) investors. Any non-accredited investor (basically 93% of the public) can invest, provided that they are not investing in excess of 10% of the greater of their net worth or annual income.

The last part is the game-changer. Already being referred to as the “Mini-IPO”, companies will now be able to connect with all their customers and have those customers become something special – owners.

Of course, the cost of compliance for a Reg A+ offering eliminates little start-ups and mom-and-pops. But for companies that were previously unable to raise money online (because of earlier limitations on general solicitation and the current prohibition on raising money for a private company from non-accredited investors online), this is going to open up major doors. Yes – the audit requirements and the fact that a lawyer will need to be involved makes the transaction cost prohibitive for a restaurant that wants to build a back patio, but for the restaurant that wants to expand by opening up five new locations? Reg A+ is perfect!

The dirty secret is that the SEC was also trying to eliminate the use of reverse-merger transactions to get a company public. In the recent past, the easiest way for a company to become publicly traded was to merge into a defunct public shell, avoiding the usual barriers to going public. The result is that a publicly traded Jiffy Lube chain that went out of business in North Carolina was all of a sudden a mining operation in Southern Arizona without much regulatory oversight. By bringing down compliance costs from a real IPO, the Reg A+ offering will give a company a path to becoming publicly traded without the need to resort to that common shenanigan.

These rules will become effective at the beginning of June. It will be interested to see if the SEC takes its responsibility to efficiently turn around these potential offerings seriously. If so, you can expect that this Fall will be full of excitement in the world of online investing. Smart consumer facing companies will take this opportunity to transform their customers into owners.


Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Salvation is through Redemption

One of the biggest challenges facing the equity crowdfunding world is the question about how a secondary market is going to work. After all, at some point, investors must have the option of selling an ownership interest. That liquidity is necessary whether an investor owns stock in either Exxon or the car dealership down the street. We take it for granted as investors that we can always sell our publicly traded simply by logging onto Ameritrade. However, for a private company (those that are in every neighborhood in America) there is a relatively illiquid market. If you are the majority owner of a private company, you can hire a business broker to hook you up with a buyer. But if you are a minority owner, you usually have very few choices.

One of the challenges of with crowdfunding is that each individual owner may have a life circumstance that makes them want (or need) to sell their stock. Although there are some legal rules (with likely more to come) that bear on when and how someone can SecondMarket.comsell their stock, one thing is certain: people are going to need to a market in order to sell. Companies like SecondMarket are putting together the pieces to let third parties bid for private company shares.

But prior to the development of these secondary markets (which are going to require further regulation in the crowdfunded economy), it is critically important that the issuing company put policies in place to allow investors the right of “redemption”. That means that the company agrees to repurchase the shares at a pre-arranged price, adjusted by a periodic appraisal.

It is a critical feature for an investor. And redemption rights allow the company to truly get the benefit of having the crowd. There’s nothing worse than having an owner who is angry at you – especially if the reason is that they are stuck with their shares.

Cricca’s term sheet always includes a redemption right. Our companies have an annual redemption policy, which allows an investor to get on a list, and then have their shares repurchased by the company at a preset price.

Investors will learn to demand this right. Companies that ignore the right of redemption do so at their own peril.

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Blog at

Up ↑

%d bloggers like this: