On May 4, 2020, the Securities and Exchange Commission (“SEC”) issued a temporary final rule easing some restrictions on small businesses seeking to raise capital pursuant to Regulation Crowdfunding (“Reg CF”). The SEC made the move in response to feedback from its Small Business Capital Formation Advisory Committee and other outreach conducted by SEC staff regarding the industry’s urgent need for expedited access to capital while maintaining investor protections as the COVID-19 pandemic persists.
The SEC adopted Reg CF in 2015 pursuant to Title III of the Jumpstart Our Business Startups Act in order to “provide startups and small businesses with capital by making relatively low dollar offerings of securities, featuring relatively low dollar investments by the ‘crowd,’ less costly.” Reg CF allows small businesses to raise up to $1,070,000 in a 12-month period without having to register their offerings with the SEC, so long as certain requirements are satisfied.
The SEC’s temporary rule eases some of those requirements for businesses organized and operating more than six months before commencement of the offering. Specifically, the provisional amendments provide the following relief:
- Offers permitted after filing of offering statement, but financial statements may be initially omitted if not otherwise available;
- Financial statements for offers more than $107,000 but not more than $250,000 in a 12-month period may be certified by the principal executive officer rather than reviewed by an independent public accountant;
- Issuers may accept investment commitments after filing of offering statement or amended offering statement that includes financial statements;
- Sales permitted after receipt of binding investment commitments covering target offering amount;
- Early closing permitted if certain disclosures are made, the intermediary provides notice the target offering amount has been met, and the issuer meets or exceeds the target offering amount at closing; and
- Investors may not cancel investment commitments after 48 hours absent a material change to the offering.
In addition, issuers relying on the temporary rule must include the following “prominent” disclosures:
- The offering is being conducted on an expedited basis due to circumstances relating to COVID-19 and pursuant to the SEC’s temporary regulatory COVID-19 relief;
- If the issuer is omitting financial statements:
- The financial information that has been omitted is not currently available and will be provided by an amendment to the offering materials;
- The investor should review the complete set of offering materials, including previously omitted financial information, prior to making an investment decision; and
- No investment commitments will be accepted until after such financial information has been provided.
- If the issuer’s financial statements have not been independently reviewed or audited:
- Financial information certified by the principal executive officer of the issuer has been provided instead of financial statements reviewed by a public accountant that is independent of the issuer.
- A description of the process to complete the transaction or cancel an investment commitment, including a statement that:
- Investors may cancel an investment commitment for any reason within no less than 48 hours from the time of their investment commitment;
- The intermediary will notify investors when the target offering amount has been met;
- The issuer may close the offering at any time after it has aggregate investment commitments for which the right to cancel period has elapsed that equal or exceed the target offering amount (absent a material change that would require an extension of the offering and reconfirmation of the investment commitment); and
- If an investor does not cancel an investment commitment within the cancellation period, the funds will be released to the issuer upon closing of the offering and the investor will receive securities in exchange for his or her investment.
The temporary rules will apply to securities offerings initiated under Reg CF between May 4, 2020 and August 31, 2020, and are effective from May 4, 2020 through March 1, 2021. The temporary rules are only available to issuers that have been operating for at least six months and with no prior history of noncompliance with Reg CF rules in previous offerings.
While the temporary rule change will provide welcome emergency relief to issuers, the SEC continues to mull over the additional substantive reforms to Reg CF it proposed last month. Those changes would raise Reg CF’s offering limit from $1.07 million to $5 million, remove investment limits for accredited investors, and revise the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating their investment limit. Public comments on those proposed rule changes are due June 1, 2020.
In light of the current rapidly changing circumstances, the pandemic relief measures and interpretations described here may change. The foregoing represents our best understanding and interpretation based on the current state of the law and guidance from regulators.