New Rules: Equity Crowdfund Guidelines Relaxed; Update from US S.E.C. Enables Equity Crowdfund Entrepreneurs To Raise More Money, Cross State Lines, and Better Leverage Internet Advertising to Promote Offering Memorandums
New rules announced this week will make it easier for small companies to raise even more capital from individual investors via equity crowdfunding. Per the Oct 26 news release from the US SEC, those seeking to raise money via crowdfunding can seek up to USD 5mil, up from the USD 1mil stipulated in the May 2016 roll-out of Regulation Crowdfunding, aka Regulation CF. Further, the latest SEC move makes it easier for cross-state promotion and loosens the knot on internet-based advertising for deals offered on equity crowdfund platforms.
The Securities and Exchange Commission on Wednesday released the new guidelines, drafted in response to the 2012 JOBS Act, for in-state crowdfunding by companies who aren’t required to register with federal regulators.
Under the new rules, companies can raise up to $5 million through crowdfunding instead of just $1 million, and they can be incorporated out of state, advertise a stake in their firm on the internet and use social media to promote their offerings, so long as they sell only to in-state residents.
As an example, up to now, internet advertising was considered a rules violation, because it reached across state lines, and a company based in Minnesota but incorporated in Delaware couldn’t raise money in Minnesota.
The new rule “eliminates an existing restriction on offers that has been outmoded by the tremendous expansion of internet communications,” Mary Jo White, the chairwoman of the Securities and Exchange Commission, said in a statement.
Mike Rothman, State of Minnesota Commerce Commissioner, said the “rule changes represent a significant step toward better alignment with modern technology and business practices” and the state Department of Commerce will review the final rules to see whether the amendments affect Minnesota’s securities regulations.
That said, in Minnesota, it will still require perfecting state legislation before small-time investors can buy a stake in a local entrepreneur’s brewery or restaurant.
“Next spring is when most of this is going to take effect, which is fine because we’re going to need to amend the state statutes to match the federal law,” said Zach Robins, a Minneapolis attorney who helped write MNvest, Minnesota’s crowdfunding legislation.
Minnesota’s crowdfunding rules now cap the amount a company can raise at $2 million, or $1 million, depending on the format used.
And it is still impossible for a company to raise investment from crowdfunding in the state, because no portals for transactions have gained approval from the Minnesota Department of Commerce. Two portals have applied to operate in the state, Robins said.
Even once the portals are in place and Minnesota’s laws are amended, investing won’t be for the faint of heart. It can cost thousands of dollars in legal and accounting fees to do a deal, though work is underway to drive down costs in Minnesota and elsewhere.
Two weeks ago, MNvest signed a deal with a firm called iDisclose, which makes software for securities-issuing documents for a flat fee of $2,000. Independent firms such as 15-year industry veteran Prospectus.com, provides bespoke offering prospectus document preparation for similar rates. Noted Prospectus.com COO Sam Goldberg, “The SEC ‘uptick’ in terms of total amounts that can be raised, as well as the easing of advertising guidelines will undoubtedly trigger a new wave of offerings, which is all good.”
Added Goldberg, “Issuers stepping into this new capital raising space still need to understand the offering documentation process is not a template boilerplate exercise; it requires professional service providers to take a high-touch approach to ensure every line within each document conforms with state and federal guidelines.”
About half of all investment crowdfunding in the U.S. is debt, with the investor lending to the business for a fixed term at a fixed rate, Robins said. For equity investing to really take off, someone will need to develop secondary markets and portals will need to build tools to allow investors to sell their shares, something that would require a hunt for a specific buyer today.
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