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Crowdfunding – USA Adopts Rules to Permit Crowdfunding

05/11/2015

At a glance

Equity crowdfunding involves a large number of individuals investing in (usually) new companies via an online platform.

The possibility of attractive returns, accessibility and easy availability of these investments has captured the attention (and cash) of the UK general public. According to data compiled by Beauhurst, in the first half of 2014 £24m was raised across 101 crowd funded equity investments compared with just £1.6m raised across 7 deals in 2011.

The rise in equity crowdfunding can be attributed to many factors with a public distrust of institutional investors, short supply of bank funding and tax incentives for investors to name just three.

Despite the popularity of crowdfunding there have been concerns over the level of risk unsophisticated investors expose themselves to. The FCA warned UK investors in 2014 that “it is very likely that you will lose all your money” and many crowdfunding websites warn that 90% of start-up companies asking for investment will fail. It is these concerns which have, until recently, persuaded the USA to tightly restrict the pool of people allowed to invest in equity crowdfunding to high net worth individuals.

USA Developments

On 30 October 2015 the US Securities and Exchange Commission (SEC) adopted final rules to permit companies to offer and sell securities through crowdfunding – the Regulation Crowdfunding. The decision represents the first major step by the SEC in implementing the JOBS Act, the aim of which is to facilitate capital raising by small businesses, three years since its passing into law.

Even with the new regulations proposed under Regulation Crowdfunding the caps on crowdfunding investments in the US will be stricter than in the UK where there are currently no caps on the amount individuals can invest and UK companies can raise a maximum aggregate amount of £3.5m per year. Seemingly, the US has decided to take a cautious approach, at least initially. However, this has not dampened the enthusiasm of some in the market such as UK crowdfunding platform Seedrs.

In response to Friday’s decision, Seedrs has launched a Beta site in the USA. The site will offer investment to the small pool of accredited investors already allowed to participate in crowdfunding in the US whilst the new rules go through the required consultation period of 180 days. Seedrs’ plan is to use this period to raise brand awareness in readiness for the pool of investors becoming drastically larger post consultation.

Seedrs’ aim is to create a global platform that will allow multi-jurisdictional investments. The opening (albeit slowly) of the US market to equity crowdfunding will certainly provide an opportunity for Seedrs to achieve its aim. It also signals the continued strength and popularity of this type of funding particularly in start-up companies. It is encouraging that the UK is at the forefront of this sector which will provide exciting opportunities in the near future.

The new crowdfunding rules and forms will be effective after the 180 day consultation period. The forms enabling a funding portal to register with the Commission will be effective from 29 January 2016.

KEY HIGHLIGHTS OF THE RECOMMENDED FINAL RULES OF REGULATION CROWDFUNDING

  • Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
  • Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
    • If either their annual income or net worth is less than $100,000, then the greater of:
      • $2,000 or
      • 5 per cent of the lesser of their annual income or net worth.
    • If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
  • Companies seeking to crowdfund are required to disclose certain information about their business and securities offering to the SEC.
  • All transactions relying on the new rules would be required to take place through an SEC-registered intermediary, either a broker or a funding portal.
  • Under the recommended rules, certain companies would not be eligible to use the exemption.  Ineligible companies would include non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies that are subject to disqualification under Regulation Crowdfunding, 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 that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

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