SEC Finalizes Regulation Crowdfunding — Capital Raising and Investment Limitations
The United States Securities and Exchange Commission has issued final rules on Regulation Crowdfunding. The final rules and forms are effective 180 days after publication in the Federal Register, except provisions related to Form Funding Portal and the amendments to Form ID are effective January 29, 2016. This post summarizes the “Limit on Capital Raised” and “Investment Limits” sections of the SEC’s adopting release.
Limitation on Capital Raised
The exemption from registration provided by Section 4(a)(6) is available to a U.S. issuer provided that the aggregate amount sold to all investors by the issuer in reliance on the exemption provided under Section 4(a)(6) during the 12-month period preceding the date of such transaction, is not more than $1,000,000. Capital raised through means other than the crowdfunding exemption is not counted towards the $1,000,000 maximum.
The SEC believes that an offering made in reliance on Section 4(a)(6) should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering. An issuer could complete an offering made in reliance on Section 4(a)(6) that occurs simultaneously with, or is preceded or followed by, another exempt offering. An issuer conducting a concurrent exempt offering for which general solicitation is not permitted, however, would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Section 4(a)(6). Similarly, any concurrent exempt offering for which general solicitation is permitted could not include an advertisement of the terms of an offering made in reliance on Section 4(a)(6) that would not be permitted under Section 4(a)(6) and the final rules.
The amount of securities sold in reliance on Section 4(a)(6) by entities controlled by or under common control with the issuer must be aggregated with the amount sold by the issuer in the current offering to determine the amount sold in reliance on Section 4(a)(6) during the preceding 12-month period. In determining whether an entity is “controlled by or under common control with” the issuer, an issuer must consider whether it possess, directly or indirectly, the power to direct or cause the direction of the management and policies of the entity, whether through the ownership of voting securities, by contract or otherwise, consistent with the definition of “control” in Securities Act Rule 405.
Additionally, the amount of securities sold in reliance on Section 4(a)(6) also includes securities sold by a predecessor of the issuer in reliance on Section 4(a)(6) during the preceding 12-month period.
Under Section 4(a)(6)(B), the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of such transaction, cannot exceed:
- if either annual income or net worth is less than $100,000, the greater of $2,000 or 5 percent of the lesser of the investor’s annual income or net worth; or
- if both annual income and net worth are $100,000 or more, 10 percent of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000.
Additionally, during the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000. Issuers are allowed to rely on efforts that an intermediary is required to undertake in order to determine that the aggregate amount of securities purchased by an investor does not cause the investor to exceed the investment limits as a result of purchasing securities in the issuer’s offering, provided that the issuer does not have knowledge that the investor had exceeded, or would exceed, the investor limits as a result of purchasing securities in the issuer’s offering.
The rules require a natural person’s annual income and net worth to be calculated in accordance with the SEC’s rules for determining accredited investor status. An investor’s annual income and net worth may be calculated jointly with the income and net worth of the investor’s spouse. However, when such a joint calculation is used, the aggregate investment of the spouses may not exceed the limit that would apply to an individual investor at that income and net worth level.
You can view our complete analysis of Regulation Crowdfunding here.
Should you have any questions regarding the foregoing please contact the attorneys set forth below or your usual contact at Stinson Leonard Street LLP. This summary does not constitute legal advice.
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