The U.S. Securities and Exchange Commission (SEC) rules on crowdfunding became effective on May 16, 2016. The rules are a hefty 685 pages long and are available, here. The Investor Bulletin issued by the SEC Office of Investor Education and Advocacy provides an overview of the rules and the JOBS Act tailored to potential investors, here. The Investor Bulletin explains that anyone can make a crowdfunding investment, but that there are limitations based on net worth and annual income on the amount that can be invested. The Investor Bulletin explains:
If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000.
Additionally, crowdfunding investments can only be made through a portal and not through other direct means. "The broker-dealer or funding portal—a crowdfunding intermediary—must be registered with the SEC and be a member of the Financial Industry Regulatory Authority (FINRA)." The Rules provide numerous requirements for intermediaries to protect investors. The Investor Bulletin also provides numerous warnings to potential investors concerning the risks associated with crowdfunding. The Rules provide that, "An issuer is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period."
Notably, the Rules also state that:
Certain companies are not eligible to use the Regulation Crowdfunding exemption. Ineligible companies 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.
Offering documents must disclose:
Information about officers and directors as well as 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, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount; • Certain related-party transactions; • A discussion of the issuer’s financial condition; and • Financial statements of the issuer that are, depending on the amount offered and sold during a 12-month period, accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. An issuer relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the issuer are available that have been audited by an independent auditor.
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