Equity Crowdfunding: The Newly Proposed SEC Rules
Looking for investors or start up capital for your new craft brewery or brewpub? Not interested in a loan? There may be another solution available to you: crowdfunding.
You may have heard of crowdfunding. It has grown exorbitantly over the past few years. Online crowdfunding websites such as KickStarter and IndieGoGo have been used by thousands of entrepreneurs and start up companies to obtain start up capital to build a product and a business. To date, in exchange for monetary contributions, these companies have had to offer something in return, such as the product being created, at a discounted price. About a year ago, for instance, I contributed a set amount of money to a KickStarter campaign focused on creating a unique iPad stand called the Slope. In exchange, I received the Slope for an amount $15-$20 less than the retail price when the product was completed (my contribution doubled as the purchase price).
In late October, 2013, the Securities and Exchange Commission (SEC) released proposed rules regarding equity crowdfunding. While the rules have been proposed, they are currently under a 90 day comment period. Therefore, the earliest that equity crowdfunding could become legal would probably be Spring of 2014, but more likely the rules will not become official (and therefore, equity crowdfunding will not become legal) until the third or fourth quarter of 2014. The difference, if equity crowdfunding becomes legal, is that contributors to a company will become actual equity shareholders in the company. Traditionally, if a company wanted to solicit contributions from the public in exchange for shares, the company had to file with the SEC and follow the SEC’s strict guidelines (which typically required great legal expense). These new rules will change everything.
Under the new rules, a company (including any of its related subsidiaries or parent companies) can raise up to $1,000,000 in a 12 month period from an unlimited number of investors in small amounts. Investors do not have to be accredited with the SEC for these types of contributions. The solicitations must come via an internet platform and all communications must be publicly viewable on the platform (or via a registered securities broker). The $1M cap exemption from traditional SEC rules does not include other exemptions. For instance, if a company receives $200,000 through another method (other than crowdfunding) also exempted by the SEC, that $200k will not apply to the $1M cap above.
However, the SEC did place limits upon individual crowdfunders. If a crowdfunder has an annual income and net worth of less than $100,000, that individual can only crowdfund the greater of $2,000 or 5% of their annual income or net worth. If a crowdfunder has an annual income or a net worth of greater than $100,000, that individual can crowdfund 10% of their annual income or net worth up to a $100,000 hard cap, per year. The $100k hard cap applies to all investors.
These are just a few of the highlights from the proposed rules (the SEC’s rule proposal is a hefty 585 pages). If you are considering crowdfunding for your new craft brewery or brewpub, and especially equity crowdfunding (once it becomes legal), you should contact an attorney to help you navigate and follow all of the SEC’s rules (and other laws impacting equity crowdfunding and start up businesses).
