The 2012 JOBS Act authorized crowdfunding, a new way to make public offerings of securities. The SEC proposed regulations for crowdfunding in October 2013. They will probably be finalized this year.

Crowdfunding will take place through intermediaries, either SEC registered broker/dealers or a new type of SEC registrant called funding portals. Both types must be members of FINRA, a not-for-profit authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly. The broker/dealers or funding portals can offer securities that are exempt from the normal public offering regulations via a website. They must comply with new SEC and FINRA regulations. Issuers will compensate the intermediary for the service. There are no registered portals yet, but there are web sites that are getting ready to go.

Investors must register with a portal in order to see listed offerings and to make a purchase. The rules place limits on the amount an individual may risk with a crowdfunding issuer in any one year. Individual  investors with annual income and net worth that are both less than $100,000 may invest up to $2,000 or 5 percent of their annual income or net worth, whichever is greater.  Investors with either annual income or net worth of $100,000 or more may invest up to 10 percent of their annual income or net worth, whichever is greater, up to a maximum of $100,000. Institutional investors will also be able to participate. The regulations place the burden of verifying that individual investors qualify on the issuers, although I imagine that they will rely on the portals to do that.

A company wanting to sell securities through crowdfunding has some hoops to jump through. Issuers must file an SEC Form C through EDGAR (an on line system) and disclose information about the business: description of the business; officer, director and major shareholder names; current capitalization and debt; reviewed or audited financial statements certified by the chief executive; a narrative discussion of the financials and more. It must also provide information about the offering: description of the securities offered, target offering amount, offering risk factors, the compensation to be paid to the intermediary and more. A version of what current public and private placement issuers have to file. The same information will have to be put into prospectus form for presentation on the portal. An offering may be made through one intermediary only. Issuers are limited to raising no more than $1 million using the crowdfunding exemption in any twelve month period.

Having sold securities to the public, a company will be required to file annual reports providing updated disclosures and reviewed or audited financial statements with the SEC and to its share or bond holders. The same as other publicly held companies.

I'd say that only businesses that can pay for professional advice will use crowdfunding to raise capital. Those that can afford it will have the ability to raise money directly from the public just like big companies. There are already broker/dealers and consultants that help smaller companies make private placement offerings. A business wanting to try crowdfunding will want to employ one of them.

The Port Charlotte SCORE Biz Owner Academy is presenting classes at the Mid County Library in Port Charlotte Saturday mornings from 10:15 a.m. to 1 p.m. Simple Steps to Grow a Business, began January 10. Internet Marketing will begin February 21 and  Marketing Warrior March 7. We are taking registrations for these classes.  Full details can be found at https://portcharlotte.score.org/localworkshops. If you like what you see, register on line and lock in the dates on your calendar. Do it now.

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