Birthed from the idea that a little from many can help small business ventures raise money, crowdfunding gives individuals the ability to pledge money to businesses in exchange for products. Regulation Crowdfunding went into effect in the U.S. on May 16, 2016, per new rules adopted by the Securities and Exchange Commission (SEC). Certain businesses will now have the ability to crowd fundraise through the offer and sale of “securities” without undertaking federal registration, provided those businesses comply with Regulation Crowdfunding.
The new regulations establish a framework for people (the “crowd”) to use the internet to buy stakes in small businesses. Crowd investors need not be high net worth individuals. However, the aggregate amount of investment securities sold (in dollars) to each individual investor depends upon each individual’s annual income and net worth, with regard to crowdfunding investments. Other requirements of Regulation Crowdfunding to be met by small businesses include, but are not limited to, the following:
– the aggregate amount of securities sold to investors by an enterprise during a 12-month period must not exceed $1,000,000;
– the securities must be offered and sold through “intermediaries,” which are either broker-dealers or funding portals; and
– the enterprise must still comply with various disclosure (such as company and financial disclosures), filing and advertising requirements.
This is not an exhaustive list, however, and there are many additional hurdles to overcome before a business may offer and sell crowdfunded investments. To read the final rule from the SEC, click here.
Time will tell whether crowdfunding will be a frequently used capital-raising platform for small businesses in Pennsylvania.
DISCLAIMER: This synopsis neither constitutes legal advice nor is it intended to serve as a comprehensive narration of law or as a means to avoid tax penalties. You are encouraged to consult with an attorney. Please contact GKH’s Corporate Practice Group at 717.291.1700 for additional information.