Defining Issues. SEC Permits Crowdfunding and Proposes Rules for Regional Securities Offerings. November 2015, No Key Facts.

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1 Defining Issues November 2015, No SEC Permits Crowdfunding and Proposes Rules for Regional Securities Offerings The SEC adopted final crowdfunding rules that permit start-ups and small companies to publicly raise capital while protecting investors. 1 At the same time, the SEC proposed amendments to current rules that would ease restrictions on intrastate and regional securities offerings. 2 Contents Background Overview of of Crowdfunding... 2 Crowdfunding Exemption from Requirements Registration... 2 Requirements... 2 Proposed Amendments to Crowdfunding Intrastate and Requirements Regional for Securities Issuers... Offerings 53 Crowdfunding Effective Date... 7 Key Facts The crowdfunding rules: Establish a regulatory structure for small companies to raise capital, and exempt them from SEC regulatory requirements; Require financial and nonfinancial disclosures; and Require the use of an intermediary (a broker-dealer or a funding portal) to conduct crowdfunding offerings. The proposed amendments to rules on intrastate and regional securities offerings would permit small companies to raise money from investors within their state without concurrently registering with the SEC. Key Impacts The final rules affect capital-raising practices for small companies by: Allowing them to raise capital from non-accredited investors; and Alleviating some of the regulatory burden they face when selling securities to raise capital. 1 SEC Release No , Crowdfunding, October 30, 2015, available at 2 Securities Act of 1933, and SEC Release No , Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings, October 30, 2015, both available at

2 Background of Crowdfunding Individuals and small companies in the United States have used crowdfunding to raise money for creative projects such as a film or music production. In return, donors would receive a ticket to a performance or credit for the production. Companies that raised money to develop new products would let their donors purchase the product first or receive merchandise. The Jumpstart Our Business Startups Act, enacted on April 5, 2012, established a regulatory structure for small companies to raise capital through securities offerings using crowdfunding. Now that the SEC issued its final rules on crowdfunding, companies can raise a limited amount of capital from the general public without going through the SEC s current registration requirements. Crowdfunding Requirements Beginning in May 2016, a company can raise capital using the new crowdfunding rules if it meets certain requirements. Restrictions also apply to investors. 3 Final SEC Crowdfunding Rule Limitation on Capital Raised A company can raise a maximum aggregate of $1 million through crowdfunding offerings in a 12-month period. Limitation on Individual Investment An individual s investment in all crowdfunding offerings is limited to $100,000 during a 12-month period. It is further limited to: The greater of $2,000, or 5 percent of the investor s annual income or net worth, if annual income or net worth is less than $100,000; and The lesser of 10 percent of the investor s annual income or net worth, if annual income or net worth is $100,000 or more. Restrictions on Resale Securities issued in a crowdfunding offering may not be transferred by investors for one year, unless they are transferred back to the company, included as part of its registered offering, or sold to an accredited investor or certain family members. Intermediary Requirements Crowdfunding offerings must be conducted through an intermediary that is registered with the SEC as a broker-dealer or as a new entity called a funding portal. A company cannot advertise the terms of its offering, but may direct investors to the intermediary. A company can use only one intermediary at a time to conduct a crowdfunding offering. The forms enabling funding portals to register with the SEC will be available January 29, The final crowdfunding rules take effect 180 days after they are published in the Federal Register. 2

3 The SEC expects that the financial condition discussion generally would not be as lengthy or detailed as Management s Discussion & Analysis for companies with existing SEC reporting requirements. Companies Ineligible for Crowdfunding The SEC s final rules exclude certain investment companies that fall under the Investment Company Act of Also excluded are companies with: Existing SEC reporting requirements; No specific business plan, or a business plan to engage in a merger or acquisition with an unidentified company or companies (a blank check company); and Incorporation that took place outside of the United States or the District of Columbia. New Form C The final rules require a company that is conducting crowdfunding offerings to file a new Form C that includes financial and other disclosures, and to distribute them to investors and its intermediary. The disclosures are subject to anti-fraud and civil liability provisions under the Securities Act of Offering Statement Disclosure Requirements Company and Offering Information. A company must disclose information about its business, officers and directors, and the offering, including how the proceeds will be used and material factors that make the investment speculative or risky. Financial Condition Discussion. The final rules also require a company to provide a narrative discussion about its financial condition that addresses its historical results of operations, liquidity, and capital resources. This includes a discussion of how the offering proceeds will affect liquidity and whether these funds, or additional funds, are needed for continuing viability of the business. Aggregate Target Offering Amounts within the Preceding 12-Month Period Financial Disclosure Requirements $100,000 or less Total income, taxable income, and total tax as reflected in the company s federal income tax returns that are certified by the principal executive officer to be true and complete in all material respects; and certified by the principal executive officer to be true and complete in all material respects OR 3

4 Companies conducting crowdfunding offerings cannot use U.S. GAAP alternatives that are available to non-public business entities to prepare their financial statements. Aggregate Target Offering Amounts within the Preceding 12-Month Period Greater than $100,000, but not more than $500,000, or companies offering more than $500,000 that are relying on the SEC s crowdfunding rules for the first time Greater than $500,000 that have previously sold securities using the SEC s crowdfunding rules Financial Disclosure Requirements If already available, financial statements that have either been reviewed or audited by an independent public accountant must be provided reviewed by an independent public accountant under the AICPA s auditing standards 4 OR If already available, financial statements that have been audited by an independent public accountant must be provided audited by an independent public accountant using either AICPA or PCAOB auditing standards A company must provide financial statements for the two most recently completed fiscal years or the period since its inception, whichever is shorter. If the financial statements for the most recently completed fiscal year are not available, a company can conduct a crowdfunding offering during the first 120 days of its fiscal year using financial statements for the prior two years. To qualify as independent, a public accountant must comply with the SEC s independence rules or the AICPA independence standards. Form C-U Updates on Capital Raising A company must file regular updates with the SEC on a new Form C-U about its progress no later than five business days after it reaches particular intervals (i.e., 50% and 100% of the goal). However, the company can satisfy this requirement if its intermediary provides the updates, but the company still must file Form C-U at the end of the offering to disclose the total amount raised. A company must amend its offering statement for material changes in its offering terms or disclosures. 4 AICPA s Statements on Standards for Accounting and Review Services, available at 4

5 Ongoing Reporting Requirements A company that sells securities through crowdfunding must file an annual report with the SEC within 120 days after the end of its most recent fiscal year. The annual report includes information required in the offering statement, excluding the audited financial statements. The principal executive officer must certify the financial statements included in the annual report to be true and complete in all material respects. However, a company that has available financial statements that have been reviewed or audited by an independent public accountant must provide them and does not need to include the principal executive officer s certification. The annual report must be disclosed on the company s Web site. Proposed Amendments to Intrastate and Regional Securities Offerings State Offerings Rule 147 The proposed amendments would eliminate the restriction that prevents offering securities over the Internet. However, only residents of the company s state or territory could purchase the securities. The proposed amendments also would ease some of the eligibility requirements. Regional Offerings Rule 504 The proposed amendments to Rule 504 of Regulation D would increase the amount of securities that may be sold in a 12-month period to $5 million from $1 million through regional securities offerings. 5 Comment Period Comments on the proposed amendments for intrastate and regional securities offerings are due 60 days after publication in the Federal Register. The SEC will review the comments and determine whether to adopt the proposed amendments. Contact us: This is a publication of KPMG s Department of Professional Practice Contributing authors: Melanie F. Dolan and Brandon T. Schaefer Earlier editions are available at: Legal The descriptive and summary statements in this newsletter are not intended to be a substitute for the potential requirements of the final and proposed rules or any other potential or applicable requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors. Defining Issues is a registered trademark of KPMG LLP. 5 For information about the regions, see 5