BY Kiran Lingam Equity crowdfunding promises to open up a new financing source for thousands of capital starved businesses around the country. Many entrepreneurs are wondering what this means for them and don’t have time to digest the complex 585 page rule proposal.
For those entrepreneurs without large amounts of spare time or excess legal budgets, here is a quick list of items that you should be aware of now:
1) It’s not legal yet. The rules can still change. The proposed rules were released on October 23, 2013 and are currently in a 90 day comment period. The absolutely earliest that equity crowdfunding in the US could become legal is in the Spring of 2014, but more likely it will be Fall or Winter 2014.
2) Up to $1,000,000 in Financing. Private companies may soon be able to raise up to $1M in a 12 month period from an unlimited number of investors in small amounts (as low as $50 or $100 each).
3) Individual Investor Limits. Each investor will have a cap on the amount they can crowdfund in a year, generally between $2,000 – $5,000 for those with income and net worth below $100,000.
4) Investor Self-Certification. Unlike Rule 506(c) of Reg D, Investors will be able to self-certify their income, net worth and previous crowdfunding investments. So no worrying about checking investor tax returns or brokerage statements.
5) Everyone can participate. No longer will early access to the next Facebook or Instagram be limited to the 1%. Unaccredited investors will be able to participate in your financing up to the individual investment limits.
6) Simultaneous Reg D Offerings. You will be able to run simultaneous Reg D and crowdfunding offerings. This means that you can do a standard offering with accredited investors and use the crowdfunding offering solely for unaccredited investors.
7) Limited Advertising. You will be able to broadly distribute notices (a “Notice”) announcing your offering and including how much you are raising and directing people to your online platform. All other communications about your offering (i.e. about how great your company is) must take place on the internet platform for everyone to see.
8) Communications Disclosure. All communications by the company or anyone being compensated by the Company about the offering must include a disclosure about the relationship or compensation being paid. Companies may pay third parties to promote the offering on the platform (or with a compliant Notice) with proper disclosure.
9) Internet Funding Portal Required. All crowdfunding offerings must be conducted via an internet platform and all communications will be publicly viewable on the platform.
10) Cap Table Issues / No Shareholder Limit. You may end up with hundreds or thousands of shareholders on your cap table. While crowdfunded securities will not count towards your 2,000 shareholder limit, this can be scary for future investors. Unfortunately, the JOBS Act does not allow traditional holding companies, but other solutions are in the works.