Academic journal article Business Law International

The State of Crowdfunding Regulation in the United States

Academic journal article Business Law International

The State of Crowdfunding Regulation in the United States

Article excerpt

In the United States, crowdfunding has evolved over the last five years to refer to several different funding approaches:

* donation-based funding that is not a securities offering;

* securities offered via an internet platform, structured in a manner to comply with the customary private placement exemption criteria under Regulation D of the US Securities Act of 1933 (the 'Securities Act'), for offerings to 'accredited investors' (being certain specified institutional investors, and natural persons who meet net income or net worth tests1) - this type of sale is sometimes referred to as 'accredited investor crowdfunding' but it is not crowdfunding in the true sense of the concept; and

* securities offered to anyone, including retail investors, pursuant to the criteria provided in the safe harbour rule 'Regulation Crowdfunding'.2

This is a broad topic and this article will focus only on retail crowdfunding pursuant to Regulation Crowdfunding.

Key elements of Regulation Crowdfunding

The key elements of Regulation Crowdfunding are as follows:

1. amount of offering? Up to $1m in a 12-month period through crowdfunding;

2. by? Issuers that are US entities (domiciled in the US), that are not reporting companies under the Securities Act, not funds and not subject to disqualification (not 'bad actors', a prior Regulation Crowdfunding issuer that has failed to provide ongoing disclosure or a development company with no business plan);

3. who can invest? Accredited investors and non-accredited investors;

4. is there a dollar cap on the amount investors may invest? Yes. An investor is subject to an investment limit on amounts invested in any 12-month period through crowdfunding equal to:

* the greater of: $2,000 or five per cent of the lesser of the investor's annual income or net worth if either annual income or net worth is less than $100,000; or

* ten per cent of the lesser of the investor's annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more;

5. is the type of security limited? No. Debt and equity securities are allowed; and

6. is an intermediary required? Yes. A registered broker-dealer or a registered funding portal must be used, and the issuer can use only one intermediary for an offering.

The issuer and the offering

Issuer eligibility criteria

Issuers must be US entities that are not reporting companies under the Securities Act, not funds and not subject to disqualification (not 'bad actors', a prior Regulation Crowdfunding issuer that has failed to provide ongoing disclosure and not a development company without a business plan). A foreign private issuer must use a US operating entity.

Offering disclosure requirements

Regulation Crowdfunding includes specific disclosure obligations. The initial disclosure about the issuer and the offering is filed with the Securities and Exchange Commission (SEC), including a discussion of the following matters:

* use of proceeds;

* targeted offering size;

* offering price;

* description of the business;

* identity of directors and officers;

* beneficial ownership and capital structure, identifying owners of 20 per cent or more of the equity;

* indebtedness;

* related party transactions of a certain size;

* description of all exempt offerings in the prior three years;

* risk factors;

* transfer restrictions;

* management's discussion and analysis; and

* information about the intermediary/portal.

Financial statement requirements

The issuer's financial statements must be prepared in accordance with US Generally Accepted Accounting Principles (GAAP). Depending on the amount of money being raised as described below, financial statements may need to be audited in accordance with either American Institute of Certified Public Accountants (AICPA) standards or Public Company Accounting Oversight Board (PCAOB) standards:

* $100,000 or less: If financial statements of the issuer are available that have either been reviewed or audited by a public accountant independent of the issuer, then these financial statements must be provided. …

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