In recognition of the particular effect of COVID-19 on small businesses, the SEC issued temporary rules earlier this month to allow small businesses greater access to interstate crowdfunding. The federal requirements for crowdfunding, called Regulation Crowdfunding or Regulation CF, had slow approval processes and arduous requirements which made it difficult for small businesses to access crowdfunded capital quickly. The temporary rules are in place until August 31, 2020, with SEC giving assurances that it will extend the temporary rules for as long as they are necessary.
What is Regulation Crowdfunding?
Generally, if a company would like to sell securities through crowdfunding, that company must register with the SEC. Regulation Crowdfunding creates a safe harbor to that registration requirement if the company meets certain requirements and sells $1.07 million or less of their securities.
Temporary Rule Changes Explained
The Temporary Rule makes several simplifications to Regulation Crowdfunding.
Changes to Financial Information Requirements
To initiate Regulation Crowdfunding, a business must file an offering statement, on Form C, to the SEC and the Crowdfunding intermediary. Typically, the business seeking crowdfunding must include financial disclosures with the initial offering statement. However, under the temporary rule, businesses can file Form C without the financials and begin gauging interest; only when the business accepts any investment must the financial information be on file.
Further, the normal Regulation Crowdfunding requirements that financial statements for businesses seeking crowdfunding must be externally reviewed at certain thresholds. Under the temporary rule, for businesses seeking more than $107,000 but less than $250,000 in a 12-month period, they must only provide federal income tax returns, which are certified by the principal executive officer, and do not need those statements to be reviewed by an independent accountant.
Changes to Timing Requirements
The second category of changes in the temporary rule relates to the time requirements of Regulation Crowdfunding. Under normal circumstances, the offering statement must be available on an intermediary’s platform for 21 days before any securities may be sold. The temporary rule suspends the 21-day requirement entirely.
The temporary rule also makes some changes to the process of closing the crowdfunding. The typical rules require that the offer was available for 21 days, that the intermediary provides at least five days’ notice of the early deadline, and that investors have the opportunity to cancel their investment until 48 hours before the deadline. However, the new rules, the business can now close sales early if the target amount is reached and the intermediary provides notice that the goal was reached.
The new temporary rules are not available to everyone who is eligible for Regulation Crowdfunding. The enhanced eligibility requirements for the Temporary rule are that the business seeking crowdfunding must have been organized and operating for at least six months and cannot have had any history of noncompliance with Regulation Crowdfunding rules.
Further, to take advantage of the temporary rule changes, business must clearly disclose to investors that the business is raising capital due as an effect of the COVID-19 pandemic.
Importantly, businesses who do not meet the above heightened eligibility requirements may use Regulation Crowdfunding, but may not rely on the flexibilities in the temporary rule.
You can visit SEC’s Fact Sheet for more information.