Crowdfunding 2016: A Guide to the New Rules for Raising Capital

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1 Crowdfunding 2016: A Guide to the New Rules for Raising Capital Benjamin M. Hron Bhron@mccarter.com Twitter #mecic

2 Overview of Rules Crowdfunding Exemption Requirements on Issuers Requirements on Intermediaries Miscellaneous Provisions

3 Crowdfunding Exemption Rules and Regulations Governing Exemption Section 4(a)(6) of the Securities Act of 1933 Regulation Crowdfunding

4 Crowdfunding Exemption Limitation on Capital Raised $1 million aggregate amount limitation in any 12-month period Maximum limit only applies to amounts raised under crowdfunding exemption

5 Crowdfunding Exemption Investment Limitation Amount an investor may purchase under 4(a)(6) in any 12-month period cannot exceed: The greater of $2,000 or 5% of the lesser of annual income or net worth of the investor if either is less than $100,000, and $10% of the lesser of annual income or net worth of such investor if both exceed $100,000, up to an aggregate investment of $100,000

6 Crowdfunding Exemption Transaction Conducted Through an Intermediary A transaction in reliance on Section 4(a)(6) must be conducted through a broker or funding portal Issuers are prohibited from using more than one intermediary to conduct an offering or concurrent offerings made in reliance on Section 4(a)(6) Transaction is required to be conducted exclusively through a platform online-only

7 Crowdfunding Exemption Exclusions from Eligibility for Crowdfunding Non-U.S. issuers Issuers subject to Exchange Act reporting requirements Investment companies as defined in the 40 Act or companies exempt under 3(b) or 3(c) of the definition Bad actors (esp. prior violation of securities laws) Issuers that have not filed required ongoing annual reports during the previous two years Issuers with no specific business plan or with a plan to engage in M&A activity with unidentified companies

8 Requirements on Issuers Disclosure Requirements - New Form C XML-based, fillable form Certain disclosures must be presented in a specified format while allowing the issuer to customize the presentation of other disclosures Rules do not mandate specific disclosure requirements for most items Form C used for initial filing, amendments, progress updates and ongoing annual reporting obligations

9 Requirements on Issuers Disclosure Requirements Company Info Name, legal status, address, website Directors and officers; 20% beneficial owners Description of the business and anticipated business plan

10 Requirements on Issuers Disclosure Requirements Offering Info Stated purpose and use of proceeds of offering Target offering amount and deadline to reach target Process for canceling an investment commitment or to complete the transaction when target is met Price per share or method for determining the price Progress updates

11 Requirements on Issuers Disclosure Requirements Ownership and Capital Structure Capitalization Terms of securities being offered and each other class of security of the issuer Description of how exercise rights of principal shareholders could affect new investors Name and ownership level of 20 percent beneficial owners How the offered securities are being valued Risks relating to minority ownership Description of restrictions on transfer

12 Requirements on Issuers Disclosure Requirements Additional Items Information about intermediary (name, CRD #, etc.) Compensation and referral fees to intermediary Legends Number of employees of issuer Material risk factors Material terms of any indebtedness Disclosure of exempt offerings in last three years Disclosure of certain related-party transactions

13 Requirements on Issuers Disclosure Requirements Financial Info Tiered financial statement disclosures < $100K tax returns $100K - $500K CPA reviewed > $500K CPA reviewed for first successful offering >$500K; audited financials for all subsequent offerings >$500K Narrative discussion of financial condition Company financial statements for last two years or since date of inception Updates about any material changes

14 Requirements on Issuers Ongoing Reporting Requirements Annual reports filed on EDGAR and company s website no later than 120 days after fiscal year end Similar information requirements to offering statement Reporting obligation continues until earliest of: Issuer becomes an SEC reporting company Issuer has filed at least one annual report since last crowdfunded sale and has fewer than 300 stockholders Issuer has filed at least three annual reports since last crowdfunded sale and issuer s assets do not exceed $10M. Issuer or another party purchases all 4(a)(6) securities Issuer liquidates or dissolves

15 Requirements on Issuers Promotion/Advertising Advertising is generally prohibited Issuers may publish a notice advertising the terms of an offering relying on Section 4(a)(6), provided that the notice includes the address of the intermediary s platform

16 Requirements on Issuers Promotion/Advertising (cont.) Notices advertising terms may include no more than the following: Existence of offering and name of intermediary with a link to intermediary s platform Amount of securities offered Nature of the securities Price of the securities Closing date of the offering period Contact info for the issuer

17 Requirements on Issuers Promotion/Advertising (cont.) Issuer may not compensate or commit to compensate anyone for promotional activities outside of the channels provided by the intermediary: Unless the issuer takes reasonable steps to ensure that the person clearly discloses the receipt of compensation each time a promotional communication is made Communications may only include information permitted by the advertising requirements

18 Requirements on Intermediaries General Requirements Must register with SEC and join FINRA Broker Funding Portal Prohibited from facilitating secondary trading through the crowdfunding platform

19 Requirements on Intermediaries Active role in policing issuers and offerings Must have reasonable basis for believing: Issuer is in compliance with relevant regulations Issuer has established means to keep required records May reasonably rely on issuer reps Must conduct background and securities enforcement history check on each issuer (incl. officers, directors and 20%+ owners) Must terminate offerings where it suspects fraud

20 Requirements on Intermediaries Obligations vis-à-vis Investors Must deliver educational materials Must clearly disclose manner in which it will be compensated

21 Requirements on Intermediaries Requirements with Respect to Transactions Must make available to SEC and potential investors information provided by issuer at least 21 days prior to first sale Must have reasonable belief an investor has satisfied the applicable investment limitations prior to permitting the investment May rely on investor reps absent reason to question Must notify investors of any material change in offering; investor must re-confirm investment within five business days

22 Requirements on Intermediaries Communication Channels Intended to promote open exchange of information about offering All communication between issuers and investors must take place through channels Must be visible to anyone, but must require registration with intermediary platform to post Agents of issuer and any paid promoters of an offering must disclose nature of compensation arrangement

23 Miscellaneous Provisions Insignificant deviations Restrictions on resales Exemption from 12(g) Bad Actor Disqualification

24 McCarter & English LLP Questions? Benjamin M. Hron