Business funding: what investment crowdfunding commits your company to

Investment crowdfunding is not a perks campaign

SBA's funding guidance describes the familiar crowdfunding model: many people contribute, and they generally receive a gift or perk rather than ownership or a financial return. Investment crowdfunding under the SEC's Regulation Crowdfunding is a different arrangement. Contributors buy securities, so the business is conducting a securities offering with legal obligations.

Every Regulation Crowdfunding offering must run online through a single SEC-registered intermediary: a broker-dealer or a funding portal. FINRA explains that funding portals register with the SEC and become FINRA members subject to its oversight. A company cannot run a regulated investment offering directly from its own website.

Eligibility has limits. The SEC lists companies that cannot use the exemption, including non-U.S. companies, certain investment companies, companies without a specific business plan, and companies that failed to meet the regulation's annual reporting requirements during the preceding two years. Bad actor disqualification rules also apply.

Know the money limits before setting a target

A company can raise a maximum aggregate of $5 million through Regulation Crowdfunding offerings in a 12-month period, counting amounts already sold under the regulation in that window.

Investors face their own limits. For non-accredited investors, the SEC caps total investment across all crowdfunding offerings in a 12-month period: if either annual income or net worth is below $124,000, the limit is the greater of $2,500 or 5 percent of the greater of the two figures; if both are at least $124,000, the limit is 10 percent of the greater figure, with an overall ceiling of $124,000. An issuer generally may rely on the intermediary to police those limits unless it knows an investor would exceed them.

Supporters can cancel an investment commitment for any reason up to 48 hours before the offering deadline, according to the SEC's investor bulletin. Securities purchased in a crowdfunding transaction generally cannot be resold for one year, with limited exceptions such as transfers to the issuer, an accredited investor, or certain family members and trusts.

The offering starts with a public filing

Before accepting money, the issuer files Form C through the SEC's EDGAR system and provides it to the intermediary. The SEC's issuer guidance says the disclosure covers officers, directors, and owners of 20 percent or more; a description of the business and the use of proceeds; the price or pricing method; the target amount and deadline; whether investments above the target will be accepted; certain related-party transactions; and a discussion of financial condition with financial statements.

The financial statement requirement scales with the amount raised under the regulation in the preceding 12 months. At $124,000 or less, issuer financial statements and certain tax return information certified by the principal executive officer can suffice. Above that, the SEC's tiers call for statements reviewed by an independent public accountant, and audited statements at the highest tier. Review or audit work takes time and money, so build it into the raise's budget and calendar.

Promotion stays inside narrow channels

The SEC restricts how an issuer advertises a Regulation Crowdfunding offering. Outside the intermediary's platform, advertising of the offering's terms is limited to a notice that points investors to the platform and includes only specified items, such as the intermediary's name, the basic terms, and factual business information.

On the platform's own communication channels, the issuer can discuss the offering but must identify itself, and anyone acting for it must disclose their affiliation. Paying a promoter is allowed only if the issuer takes reasonable steps to ensure the promoter discloses the compensation with each communication. The rules also permit limited testing-the-waters outreach before the Form C is filed, but only with prescribed statements, and those materials must be filed with the Form C.

The obligations continue after the money arrives

Closing the round does not end the filing calendar. An issuer that sells securities in a Regulation Crowdfunding offering must file an annual report on Form C-AR within 120 days after its fiscal year ends and post it on its own website. The obligation continues until a listed termination condition applies, such as filing at least one annual report and having fewer than 300 holders of record, and ending it requires a final Form C-TR notice.

During the offering itself, the SEC requires progress updates within five business days of reaching 50 percent and 100 percent of the target. A material change to the offering requires an amendment, and outstanding investment commitments must be reconfirmed within five business days or they are considered cancelled.

These are federal securities obligations, and the SEC notes that state law requirements can also apply. Crowdfunding investors become security holders in the company, so weigh that ownership and reporting reality against simpler funding routes before choosing this one. A qualified professional can help assess the business-specific requirements.