• Regulation Crowdfunding: What You Need to Know
  • June 26, 2016 | Author: Rebecca H. Forest
  • Law Firm: Lowndes, Drosdick, Doster, Kantor & Reed Professional Association - Orlando Office
  • Regulation Crowdfunding, new rules promulgated by the SEC to assist small issuers in raising capital, became effective May 16, 2016. To assist issuers in their crowdfunding efforts, the SEC has issued the "Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers," which provides issuers helpful guidance on how the regulation works. The guide provides an overview of the regulation, issuer disclosure requirements (both during and after the crowdfunded offering), restrictions on advertising a Regulation Crowdfunding offering and promoter compensation, restrictions on resales of securities purchased in a crowdfunded offering, and a discussion of "bad boy" events applying to the issuer, its directors, officers, certain beneficial owners and other covered persons that could disqualify an issuer from using Regulation Crowdfunding.

    The SEC also has published additional guidance clarifying interpretation of Regulation Crowdfunding to assist issuers in complying with the new regulation.

    Use of Regulation Crowdfunding offerings may get off to a slow start due to several factors. The regulation contains many requirements and restrictions, including the portal registration requirements, investment amount limits and issuer disclosure and reporting obligations. Issuers may be reluctant to use a capital raising method that could result in a multitude of small investors to which issuers and their management are responsible. The investing public may be reluctant to invest in unknown and possibly unproven enterprises, especially with the lack of a secondary trading market enabling investors to liquidate their investment. All of this may reduce the appeal of the new regulation. Only time will tell whether this new capital raising alternative will prove useful for small issuers.