Temporary SEC Rules Ease Regulation Crowdfunding Requirements Now

For many U.S. issuers that have been in operation for six months or longer, raising much-needed funds through Regulation Crowdfunding has gotten easier. In response to feedback from established U.S. small business owners struggling during the COVID-19 pandemic and related shutdowns, the Securities and Exchange Commission (SEC)'s temporary final rules now offer conditional relief easing and expediting the offering process for said issuers.

Let us examine how the new rules might affect the timing and documentation of your next Regulation Crowdfunding offering.

First, be sure to keep in mind that although these new SEC amendments will remain in effect until March 1, 2021, they apply only to Regulation Crowdfunding securities offerings made between May 4 and August 31, 2020. To be eligible for the new rules, an established U.S. issuer who has previously sold securities in a Regulation Crowdfunding offering must have complied with the requirements in section 4A(b) of the Securities Act and the related rules.

Additionally, as stated by the SEC, the following issuers are expressly excluded:

“• Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

• Investment companies;

• Blank check companies;

• Issuers that are disqualified under Regulation Crowdfunding’s disqualification rules; and

• Issuers that have failed to file the annual reports required under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement.”

Please note that the rules exclude these issuers, even if their businesses have been in operation for the requisite six-month period or longer.

For issuers meeting the enhanced eligibility criteria who offer $250,000 USD or less in Regulation Crowdfunding securities offerings in a 12-month period, the temporary COVID-19 relief loosens specific financial statement review requirements. Funds will also be available to an issuer sooner than was typical prior to the temporary relief. Furthermore, the rules offer increased flexibility so that issuers can assess market interest in an offering before developing their offering materials.

Some of the SEC’s temporary changes grant the issuer more time to prepare financial statements.

Here's how it works.

According to the amendments, an issuer may now put out an offering after filing its offering statement, even if financial statements are initially omitted when unavailable. Later, an issuer may accept investment commitments once it has filed an offering statement that includes financial statements, or an amended offering statement that includes financial statements. The temporary relief also changes the necessary review process for financial statements when an issuer offers between $107,000 USD and $250,000 USD in a 12-month period using Regulation Crowdfunding. Instead of having an independent public accountant review the statements, the issuer may now have its financial statements certified by its principal executive officer, along with certain information from its tax returns.

Without the temporary Regulation Crowdfunding relief, the information contained in offering statements needed to be publicly available for 21 days or longer before sales could begin. Now, once an issuer has received binding investment commitments that cover the target offering amount, sales may occur. Keep in mind that it takes 48 hours for a commitment to become binding. Furthermore, unless an issuer materially changes the offering, investors may not cancel once 48 hours have passed from the time of their commitment, or later, if the issuer designates a later date.

The easing of Regulation Crowdfunding rules is a welcome path to raising capital for many businesses in the U.S. who may or may not be eligible for the Paycheck Protection Program. Additionally, issuers wishing to publicly solicit for private placement offerings may utilize an SEC registration exemption available under Rule 506(c) of Regulation D of the Securities Act. Unlike crowdfunding offerings, however, Rule 506(c) offerings are open only to a specific category of investors called accredited investors.