New Crowdfunding Rules Effective May 16, 2016

The SEC’s long-awaited rules to permit crowdfunding are effective as of May 16, 2016. These rules implement Title III of the Jumpstart Our Business Startups Act. Pub. L. 112-106. We briefly summarize this new fundraising opportunity below.

Regulation Crowdfunding permits an issuer to raise up to $1 million in any rolling 12-month period.

Regulation Crowdfunding imposes other important limitations:

An offering must be conducted exclusively through one SEC-registered intermediary – a registered broker dealer or “funding portal.”

• An “Offering Statement” must be publicly filed with the SEC.
• Financial statements are required to be reviewed by an independent accountant or audited, depending upon the size of the offering and whether it is the issuer’s first crowdfunding offering.

An investor may invest, over any rolling 12-month period, an aggregate in all Crowdfunding offerings of up to:

• If the investor’s annual income or net worth is less than $100,000, the greater of $2,000.00 or 5% of the lesser of such investor’s annual income or net worth;
• If the investor’s annual income and net worth are both equal to or more than $100,000, 10% of the lesser of such investor’s annual income or net worth; and
• In no event may a single investor invest more than $100,000 in all Crowdfunding offerings during any rolling 12-month period.

Annual reports are required to be filed with the SEC until:

• The issuer is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended;
• The issuer has filed one annual report and has less than 300 holders of record;
• The issuer or another party repurchases all of the securities offered in the Crowdfunding offering; or
• The issuer liquidates or dissolves.

Regulation Crowdfunding may provide a useful opportunity for many start-up companies. In evaluating a Crowdfunding offering, we encourage companies to consider carefully the impact of a large number of previously unknown investors holding equity or debt positions. The administrative burden of responding to investor questions may be significant. We also caution companies that the rules prohibiting general solicitation in a securities offering apply to Crowdfunding offerings, and these offerings may only be advertised through the registered broker dealer or funding portal engaged by the company to conduct the offering.

Shelley Detwiller Digiacomo is a principal member of DDP Legal where she specializes in securities law, specifically on advising private companies and investors with respect to securities transactions. www.ddplegal.com‍