SEC Relief for Small Businesses

On May 4, 2020, the SEC announced temporary conditional relief for small businesses that have offered Regulation Crowdfunding offerings in the past to allow them to raise additional funding through Regulation Crowdfunding investment offerings under more expedited and less strict criteria.

Most of us know what Crowdfunding is: Crowdfunding refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people.   

A Regulation Crowdfunding offering is when a company offers and sells securities in relatively small investments from a large number of people. These Crowdfunding sales are offerings of equity in a business, so they are regulated by the SEC and have to be facilitated online through an SEC-registered broker-dealer or a funding portal.

The SEC’s temporary relief is aimed at smaller stable companies who are not able to raise enough funds through the EIDL, SBA PPP Loans, or Main Street Lending Facility and need capital to stay in business during the COVID-19 pandemic.

These temporary new rules around Regulation Crowdfunding offer flexibility to the company issuing the securities. They can inquire about investment interest prior to preparing full offering materials, and the window of time it takes to receive funds is significantly shortened. The new rules also exempt issuers from certain financial statement review requirements if they offer between $107,000 and $250,000 in securities in reliance on Regulation Crowdfunding over a 12-month period. 

The looser requirements apply to Regulation Crowdfunding securities offerings initiated between May 4, 2020, and August 31, 2020.

Here is a breakdown of the existing Regulation Crowdfunding and the Amendments created recently*:

  • Eligibility Requirement:
    • Existing Regulation Crowdfunding: the exemption is not available to: non-U.S issuers, issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, investment companies, blank check companies, issuers that are disqualified under Regulation Crowdfunding’s disqualification rules, and issuers that have failed to file the annual reports required under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement.
    • Amendment: To rely on temporary rules, issuers must meet the existing eligibility criteria PLUS: the issuer cannot have been organized and cannot have been operating less than six months prior to the commencement of the offering AND an issuer that has sold securities in a Regulation Crowdfunding offering in the past, must have complied with the requirements in section 4A(b) of the Securities Act and the related rules.
  • Offer permitted:
    • Existing Regulation Crowdfunding: after filing of offering statements (including financial statements)
    • Amendment: after filing of offering statement, but financial statements may be initially omitted (if not otherwise available)
  • Investment Commitments Accepted: 
    • Existing Regulation Crowdfunding: after filing of offering statement (including financial statements)
    • Amendment: After filing of offering statement that includes financial statements or amended offering statement that includes financial statements
  • Financial statements required when an issuer is offering more than $107,000 but not more than $250,000 in a 12-month period
    • Existing Regulation Crowdfunding: financial statements of the issuer reviewed by a public accountant that is independent of the issuer
    • Amendment: financial statements of the issuer and certain information from the issuer’s Federal income tax returns, both certified by the principal executive officer.
  • Sales permitted:
    • Existing Regulation Crowdfunding: after the information in an offering statement is publicly available or at least 21 days
    • Amendment: as soon as an issuer has received binding investment commitments covering the target offering amount 
      • NOTE: commitments are not binding until 48 hours after they are given
  • Early Closing permitted: 
    • Existing Regulation Crowdfunding: once target amount if reached if: the offering remains open for a minimum of 21 days, the intermediary provides notice about the new offering deadline at least 5 business days prior to the new offering deadline, investors are given the opportunity to reconsider their investment decision and to cancel their investment commitment until 48 hours prior to the new offering deadline, and at the time of the new offering deadline, the issuer continues to meet or exceed the target offering amount.
    • Amendment: as soon as binding commitments are received reaching target amount if: the issuer has complied with the disclosure requirements in temporary Rule 201 (z), the intermediary provides notice that the target offering amount has been met, and at the time of the closing of the offering, the issuer continues to meet or exceed the target offering amount.
  • Cancellations of investment commitments permitted:
    • Existing Regulation Crowdfunding: for any reason until 48 hours prior to the deadline identified in the issuer’s offering materials. Thereafter, an investor is not able to cancel any investment commitments made within the final 48 hours of the offering (except in the event a material change to the offering)
    • Amendment: for any reason for 48 hours from the time of the investor’s investment commitment (or such later period as the issuer may designate). After such 48 hour period, an investment commitment may not be canceled unless there is a material change to the offering.

If your company is unsure as to whether they meet the criteria for Regulation Crowdfunding, reach out to the team at TGG Accounting.  We partner with companies to support their accounting teams.  Call us today to learn more. 


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