Crowdfunding, an Internet based means of raising capital is getting a lot of attention. The attention it has garnered is not only from businesses resorting to it but from the SEC as well. Crowdfunding is instrumental for startups and small business, but it has originally been a vehicle for fund raising for worthy and charitable causes. The function has been through for a variety of methods and purposes, for instance, by donations for charitable purposes, by issuing rewards; by providing a lending process in exchange for the promise to pay timely with accrued interest; and by equity interest based contributions. Crowdfunding and its new limits are addressing the function when the operation is to embed a securities-based crowdfunding offering. This is a variation from what traditionally is being done by businesses where raising capital is by virtue of seeking a commercial loan.
The SEC has stated that any offering or sale of a security must be registered unless there is an applicable exemption. The requirement of disclosures are a key element to qualifying for an exemption from the registry requirement. Additionally, small businesses seeking funding have to meet other federal and state laws that regulate offers and sales of securities. Yet, because of the burgeoning interest in raising needed capital in this novel internet based vehicle, the SEC this October depicted crowdfunding and its new limits regarding securities based offering through online platforms.
Under its Jumpstart Our Business Startups (JOBS) Act section 4(a)(6) to the Securities Act of 1933, the SEC allows offerings through internet network platform without registering and preempts the state registration requirement. It addresses those crowdfunding vehicles of companies seeking security-based capital, but it established a cap of 1 million a year (12 months) with an individual investor limit of $2,000 or 5% of investor’s income if the investor’s net worth is less than $100,000. The personal investment limited inches higher the higher the net worth of the investor. The company issuing the offer will have to file electronically its disclosures and details for public viewing (form c). The account opened by an investor will be done through an intermediary and its rules, where it may decline an issuer on its internet platform for reasons that may include fraud and is tasked to provide issuer’s disclosures. As these conditions take form in 2016, small business have a greater chance of raising the necessary capital through crowdfunding.
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