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SEC Crowdfunding Rule – Nuts and Bolts

Thanks to Jake Clabaugh of Madison Services Group for this post.

Business Forward hosted a conference call with Sebastian Gomez, Chief of the Office of Small Business Policy at the Securities and Exchange Commission (SEC) to discuss implementation of SEC’s crowdfunding rule. Equity crowdfunding allows small businesses to raise capital in exchange for an equity stake in the business using a website or “funding portal” and without having to register their offering with the SEC. Mr. Gomez highlighted three important requirements of the final crowdfunding rule during today’s call:

1. Limits for companies – Businesses may raise up to $1 million in any 12-month period.

2. Limits for investors – The rule separates investors into two categories based on that individual’s annual income and net worth. This limits the risk that individuals with lower incomes/net worth make take.

a. Less than $100,000 – May annually invest up to $2,000 or 5% of their income/net worth*, whichever is greater. *The lower of annual income/net worth is used

b. Greater than $100,000 – May annually invest up to 10% of their income/net worth* to a maximum of $100,000. *The lower of annual income/net worth is used

3. Disclosures – Businesses must provide information to the funding portal about the company that will be made public to potential investors. The level of disclosure is based on how much capital the business is trying to raise.

a. Up to $100,000 – Financial statements certified by the firm’s CEO.

b. $100,000 – $500,000 – Reviewed financial statements.

c. Greater than $500,000 – Reviewed financial statements for the business’ first offering and audited financial statements for each offering thereafter.

Funding portals may begin to register with the SEC on Friday, January 29. Businesses can begin crowdfunding through registered funding portals on May 16, 2016.