Crowdfunding

By Peter V. Hogan, Esq.

On April 5, 2017, the Securities and Exchange Commission (the “SEC”) announced that it adopted amendments to increase the amount of money companies can raise through crowdfunding to adjust for inflation from $1,000,000 to $1,070,000. On April 5th, the SEC also approved amendments for inflation adjustments the annual gross revenue threshold used to determine eligibility for benefits offered to “emerging growth companies” (“EGCs”) under the Jumpstart Our Business Startups (“JOBS”) Act. The SEC is revising the EGC definition under Rule 12b-2 to mean an issuer that had total annul gross revenues of less than $1,070,000 (adjusted from $1,000,000).

The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it was enacted on April 5, 2012. The SEC approved the new thresholds on March 31, 2017 and they will become effective when published in the Federal Register.

BACKGROUND

Section 101 of the JOBS Act added Section 2(a)(19) to the Securities Act of 1933 (the “Securities Act”) and Section 3(a)(80) to the Securities Exchange Act of 1934 (the “Exchange Act”) to define the term “emerging growth company.” Under those sections, the SEC is directed every five years to adjust the annual gross revenue amount used to determine EGC status for inflation by reflecting the change in the Consumer Price Index for All Urban Consumers (“CPI-U”) published by the Bureau of Labor Statistics (“BLS”) over said five year period. In order to do this, the SEC adopted amendments to the Securities Act Rule 405 and Exchange Act Rule 12b-2 to include a definition for EGC that reflects an inflation-adjusted annual gross revenue threshold. The JOBS Act also provided an exemption from the registration requirements of Section 5 under the Securities Act for certain crowdfunding transactions which helps reduce the cost of raising money for entrepreneurs. The SEC adopted amendments to Rule 100 and 201(t) of Regulation Crowdfunding and Securities Act Form C to reflect the required inflation adjustments.

Additionally, the SEC adopted Sections 102 and 103 of the JOBS Act to amend the Securities Act and the Exchange Act to provide several exemptions from certain disclosure, shareholder voting, and other regulatory requirements for any issuer that qualifies as a EGC. The exemptions reduce the financial disclosures an EGC is required to make in a public offering registration statement and relieve an EGC from conducting advisory votes on executive compensation, as well as provide relief from a number of accounting and disclosure requirements.

Below please find the tables demonstrating the inflation-adjustments made by the SEC which increase certain maximum amounts raised and invested under Regulation Crowdfunding.

Table 1:  Inflation-Adjusted Amounts in Rule 100 of Regulation Crowdfunding (Offering Maximum and Investment Limits)

Regulation Crowdfunding Rule Original Amount Rounded Inflation-Adjusted Amount
Maximum aggregate amount an issuer can sell under Regulation Crowdfunding in a 12-month period (Rule 100(a)(1)) $1,000,000 $1,070,000
Threshold for assessing investor’s annual income or net worth to determine investment limits (Rule 100(a)(2)(i) and (ii)) $100,000 $107,000
Lower threshold of Regulation Crowdfunding securities permitted to be sold to an investor if annual income or net worth is less than $107,000 (Rule 100(a)(2)(i)) $2,000 $2,200
Maximum amount that can be sold to an investor under Regulation Crowdfunding in a 12-month period (Rule 100(a)(2)(ii)) $100,000 $107,000

Table 2:  Inflation-Adjusted Amounts in Rule 201(t) of Regulation Crowdfunding (Financial Statement Requirements)

Regulation Crowdfunding Rule Original Offering Threshold Amount Rounded Inflation-Adjusted Amount
Rule 201(t)(1) $100,000 $107,000
Rule 201(t)(2) $500,000 $535,000
Rule 201(t)(3) $1,000,000 $1,070,000

While these adjustments may seem small, they may make a big difference to a company raising money to expand its business or an investor looking to qualify to invest in a crowdfunding transaction.


Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions, please feel free to contact the author, Peter Hogan, by email at phogan@clarktrev.com or telephonically at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this blog is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com.

 

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