Crowdfunding is the raising of capital for projects using the internet to collect money from visitors and community members interested in the project.
These projects include:
- creative art
- charity efforts
- open source software and hardware
- new product launches
- startups
The funding efforts typically use a web page on a crowdfunding platform.
This page contains:
- project description
- reader comments
- social networking
- list of offers in return for payment amounts
- bar graph showing the progress of the fundraising effort
- payment link
The fundraising takes place over a set period of time. If the financial goal is not met, the money is usually returned to the investors. There are some crowd funding sites which allow the project to keep any money which has been contributed.
Examples of crowdfunding platforms are:
- Kickstarter
- Indiegogo
- Chip-in
Crowdfunding Law
Up until now, SEC regulations prohibited soliciting investment directly from investors online. This is now changing with the recently passed JOBS Act.
The crowdfunding legislation portion of the act allows:
- Up to $1 million to be raised
- Investment of up to $2,000 or 5 percent annual income or net worth for those with less than $100,000 annual income
- Investment of up to 10 percent of the annual income or net worth for those with $100,000 or more annual income
- Up to 2000 investors
The Crowdfunding Bill Requirements
Use of a fundraising intermediary:
- Broker or Crowdfunding Portal
- Registered with SEC
- Registered self-regulatory organization per section 3(a)(26) of the Securities Exchange Act of 1934
- Provide disclosures related to risks and investor education materials
- ensure the investor
- reviews investor education info
- affirms understanding the risk
- answers questions to show knowledge of risk from
- startups
- emerging businesses
- small issuers
- illiquidity
- For officers, directors, persons holding over 20% equity
- background check
- securities enforcement history
- provide information from issuer to SEC and investors no later than 21 days prior to offering
- only forward proceeds if meet or exceed initial target offering amount
- allow investors to cancel commitments to invest
- monitor individual investment limits over 12 month period
- maintain investor privacy
- not pay promoters, finders, or lead generators for personal investor information
- intermediary directors, officers, or partners prohibited having financial interest in offerings using its services
Crowdfunding portals exempt from being licensed brokers if:
- member of a national securities association
- avoid the following activities:
- offering investment advice
- recommending purchase or sale of securities
- marketing securities displayed on their sites
- commissions to employees or agents for securities transactions on their sites
- handling investor funds
Start up businesses issuing crowdfunded securities must:
- file with the SEC
- prior to offering
- annually
- inform the intermediary along with current and potential investors of:
- entity name
- legal status
- physical address
- web address
- names of officers and directors
- names of holders of more then 20% of shares
- business description
- business plan
- financial statements based on total of offerings over previous 12 months to present
- for offerings totaling up to $100,000
- most current tax return, if any
- financial statements certified as true by principle officer
- for offerings totaling between $100,000 up to $500,000
- financial statements reviewed by CPA
- for offerings over $500,000
- audited financial statements
- description of purpose and use of proceeds
- targeted offering amount
- deadline to raise targeted funding amount
- regular updates of fund raising progress
- securities pricing, at issuers option, either
- fixed price
- variable price
- method for calculating price made public
- investors informed in writing of final price prior to sale
- investor allowed to cancel transaction prior to sale
- ownership and capital structure
- terms of offering
- all classes of securities issued
- how terms may be modified
- summary of differences in classes of securities
- shareholder rights
- dilution
- qualification
- how rights of principal shareholders could diminish purchasers of offering
- existing shareholders of over 20%
- name
- ownership level
- valuation
- how determined
- how may be determined in future
- possible changes by future corporate actions
- risks
- minority ownership
- corporate actions
- issuance of more shares (dilution)
- acquisition
- sale of assets
- transactions with related parties
- advertising of terms of offering not allowed
- may post notices directing investors to intermediary’s web site
- paid promoters must disclose in promotional communications
- provide annual report to investors
Transfer of shares restricted for one year to:
- return to issuer
- accredited investor
- part of a registered offering
- family member
Issuer exempted from public reporting company when limits exceeded:
- number of shareholders
- asset amount
- SEC to determine new limits
States:
- may not require registration of Federally exempted crowdfunding offerings
- may, in cases where
- state is issuer’s place of business
- purchasers of 50% or more are residents
- require
- filing of notice of offer
- filing fees
Inflation adjustment of dollar amounts in exemption:
- at least once every five years
- according to Consumer Price Index
Many of these provisions are still subject to specific rules to be specified by the Securities and Exchange Commission. The Crowdfunding statutes allow a period of nine months for the regulations to be written and implemented. The law does not go into effect until this process is complete. This can take up until April 5, 2013.
Referring Searches:
- crowdfunding investor limits
- brokerages for crowd funding
- chip in crowd funding