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Crowdfunding Exemptions – What Are They?

Crowdfunding Exemptions – What Are They?

Image credit: scott*eric

As discussed in an earlier post, the JOBS Act now allows for a small business owner and startups to get funding, otherwise known as crowdfunding, from social media or other forms of Internet outreach. This provides them with money they otherwise would not have been able to get. Some restrictions do apply for both the business owner and the investor.

The biggest benefit is that companies now can get an unlimited number of investors for their business. As long as certain requirements are met, the JOBS Act has provided some crowdfunding exemptions.

Crowdfunding exceptions –

  • The amount of securities an issuer can sell to an investor must be limited to $1 million in a twelve-month period of time.
  • The process must be done through an SEC approved broker or what is called a “funding portal.”
  • The issuer, or business, cannot advertise to the investor the terms of the exceptions, unless they are directing the investor to the “funding portal” or their SEC-registered broker.

Information and disclosure requirements – The issuer must file two types of records with the SEC. The first is the initial filing requirement. The level of filing depends on the target offering amount. The higher it is, the higher the financial disclosure must be. The records to be disclosed can be anything from financial statements and risk factors to the intended use of the raised money. Secondly, the business must file yearly with the SEC and provide their investors with a financial report of the company.

Transfer restrictions – Securities issued under these crowdfunding exemptions are not allowed to be transferable within 12 months, except for in two situations:

  • They can be transferred back to the issuer, to another investor (but they must be accredited) or to a registered offering.
  • They can be transferred to a family member of the investor. This is also the case in the event of divorce or death.

A word of caution – Final regulations have not yet been issued by the SEC so some of these provisions may change.

Do you have any questions on your crowdfunding exemptions? If so, give us a call. Stock Connections specializes in SEC laws and regulations.

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