Information for Potential Issuers

Advertising and Communications in General

Under Rule 204 of Regulation Crowdfunding, issuers are only permitted to advertise their offerings through a notice containing certain specific limited information (similar to “tombstone ads” complying with Rule 134 under the Securities Act). The notice must direct readers to the crowdfunding intermediary platform for the offering. Potential investors can then access additional information about the offering through the Portal. The notice may be in print or distributed electronically, including through video, social media, and the issuer’s website.

Issuers’ offering notices advertising the terms of the offering shall not include anything more than the following:

  • A statement that the issuer is conducting an offering.
  • The name of the intermediary.
  • A link to the intermediary’s platform.
  • The terms of the offering, including:
  • the amount of securities offered;
  • the nature of the securities;
  • the price of the securities; and
  • the closing date of the offering period.
  • Factual information about the legal identity and business location of the issuer, limited to:
  • the name of the issuer;
  • the address, phone number and website of the issuer;
  • the e-mail address of a representative of the issuer; and
  • a brief description of the business of the issuer.

While similar to “tombstone ads” under the Securities Act, Regulation Crowdfunding advertising notices must direct investors, for example, through a link, to the relevant intermediary’s offering platform. Issuers are not restricted in the manner in which they distribute advertising notices. As a result, an issuer may post notices in newspapers or on its own website. Also, issuers may take advantage of social media to attract investors. These notices do not have to be filed with the SEC or the Portal, and information that occurs in issuers’ ordinary course of operations, which does not refer to the terms of the offering, may be communicated without limitations.

The Portal places no restriction on the issuer’s ability to communicate with investors or potential investors on the Portal, as long as the issuer identifies itself as the issuer in these communications. Accordingly, the issuer is able to answer questions or challenge statements made about it during the offering process.

Prior to commencing a crowdfunding offering and filing a Form C, an issuer may disseminate any information that does not constitute an offer of securities, such as factual business information that does not condition the public mind or arouse public interest in a securities offering.

Advertising by a Crowdfunding Issuer

Issuers are prohibited from advertising the terms of an offering, “except for notices which direct investors to the funding portal or broker.” Regulation Crowdfunding describes the acceptable content of such notices, which can include no more than:

  • A statement that the issuer is conducting an offering, the name of the intermediary through which the offering is being conducted and a link directing the investor to the intermediary’s platform;
  • The terms of the offering; and
  • Factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number and website of the issuer, the e-mail address of a representative of the issuer and a brief description of the business of the issuer.

The SEC stated in the adopting release that the permitted notices will be similar to “tombstone ads” under Securities Act Rule 134, except that the notices are intended to direct an investor to the intermediary’s platform through which the offering is being conducted, such as through a link directing the investor to the platform.

Should the Portal become aware that any issuer with an offering on its website violate any rules, including advertising rules, it will immediately contact the issuer and suspend the offering.  If it is then determined that the violation cannot be cured, then the offering will terminate and all money invested by investors will be returned in full.

General Disclosure Requirements

Section 4A(b)(1) of the Securities Act requires issuers relying on the Regulations Crowdfunding Exemption (Regulation Crowdfunding) to conduct a crowdfunding offering to file certain information with the SEC, and to provide it to investors, potential investors and the crowdfunding intermediary for the offering. The SEC has authority to require additional disclosure under Section 4A(b)(1)(I) of the Securities Act of1933.

An issuer seeking to raise capital under Regulation Crowdfunding must file certain disclosures with the SEC in an offering statement on new Form C, and provide the same disclosures to investors through the issuer’s chosen portal/intermediary. The initial offering statement must include the information that is displayed on the relevant intermediary’s platform.

Issuers can have the Form C prepared by securities attorneys or professionals.  The Portal has a list of independent professionals who the issuer can hire to handle the necessary checks, drafting, completion and filings of Form C and related requirements.  The filings must be made electronically on the SEC’s Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system, and the issuer must check the relevant box on the cover of the Form C to indicate the purpose of the Form C filing.

Form C will be used for all of an issuer’s filings with the SEC related to offerings made in reliance on Regulation Crowdfuding.

Certain information filed on Form C must be presented in eXtensible Markup Language (“XML”) format. Form C contains an optional “Question and Answer” (“Q&A”) format that an issuer may use to provide the disclosures that are not required to be presented in XML format. The questions in the Q&A are designed to facilitate the preparation of the required Form C disclosures. An issuer using the Q&A format will prepare its disclosures by answering the questions and filing disclosures as an exhibit to the Form C. An issuer can also customize the presentation of its non-XML disclosures and file such disclosures as exhibits to the Form C in portable document format (“PDF”). Exhibits submitted in PDF will still be considered official filings, but they allow an issuer to take advantage of more diverse presentations of information, including charts, graphs, and transcripts or descriptions of video presentations or other media not reflected in the PDF.

Issuers do not need to provide physical or electronic copies of the required disclosures directly to investors. Instead, an issuer may satisfy its disclosure obligations by referring investors and potential investors—through a posting  on issuer’s website or by email—to the information about the issuer.

The SEC requires that issuers provide certain information to investors through the intermediaries’ platforms and to the SEC by filing of Form C via EDGAR. Form C will consist of XML-fillable fields in the front portion of the form and then exhibits, which will include the rest of the information required to be filed.  The Form C can also be filed as PDF with exhibits. Some information is mandatory, but the issuer may include additional information in the form. The mandatory information for each issuer includes the following:

  • The name, legal status (i.e., form, state, and date of organization), physical address, and website address of the issuer.
  • The names of the directors and officers of the issuing organization (and any persons occupying a similar status or performing a similar function), the positions and offices held by those persons, the amount of time they have served in those positions, and the business experience those persons have acquired over the past three years.
  • The name of each person who is a beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities. These are the same shareholders covered by the bad actor disqualification provisions discussed below.
  • A description of the issuer’s business and an anticipated plan of said business.
  • The number of employees currently working for the issuer.
  • A discussion of the material risk factors that make an investment in the issuer speculative or risky.
  • The target offering amount and the deadline to reach said amount, including a statement that if the sum of the investment commitments does not equal or exceed the target offering amount at the offering deadline, no securities will be sold in the offering, investment commitments will be cancelled, and committed funds will be returned.
  • A statement about whether the issuer will accept investment monies in excess of the target amount and the maximum it will accept. If the issuer accepts investments above the stated target, it must state the method it will use to allocate oversubscriptions.
  • A description of the purpose and intended use of the offering proceeds. The SEC elaborates that it expects issuers to provide a detailed description of the intended use of proceeds with sufficient information to allow investors to understand how the offering proceeds will be used. If an issuer is uncertain as to how the proceeds will be used, it should identify the probable uses and the factors impacting the selection of each such use. Similarly, if the issuer accepts proceeds above the target amount, it should indicate the purpose and intended use for those excess funds.
  • A description of the process to complete the transaction or to cancel an investment commitment.
  • The price of the securities or the method for determining the price. If the issuer has not set a price at the start of the campaign, it must provide a final price prior to any sale of securities.
  • A description of the ownership and capital structure of the issuer. Under this subsection, this requirement also includes:

any rights held by principal shareholders;disclosure of the terms of the securities being offered as well as each other class of security of the issuer;

  • the name and ownership percentage of any 20 percent beneficial owner;
  • how the securities being offered are valued and how the securities may be valued in the future;
  • risks to purchasers of the securities relating to minority ownership and the risks associated with corporate actions like the additional issuance of shares, issuer repurchases, and the sale of the issuer or issuer assets to related parties; and
  • a description of the restrictions on the transfer of the securities.
  • The name, SEC file number, and Central Registration Depository number of the intermediary conducting the offering.
  • A description of the intermediary’s financial interests in the issuer’s transaction, including the amount of compensation paid to the intermediary for conducting the offering and the amount of any referral or other fees associated with the offering.
  • A description of the material terms of any indebtedness of the issuer. Material terms include the amount, interest rate, maturity date, and any other terms a purchaser would deem material.
  • A description of any exempt offering conducted within the past three years. The description should include the date of the offering, the offering exemption upon which it relied, the type of securities offered, the amount of securities sold, and the use of the proceeds.
  • A description of any completed or proposed transaction involving the issuer or any entity under common control with the issuer for value exceeding 5 percent of the amount raised under Regulation Crowdfunding within the past twelve months, including the current offering, when a control person, promoter, or family member had a direct or indirect material interest.
  • A description of the financial condition of the issuer, including information regarding liquidity, capital resources, and historical results of operations covering each period for which financial statements are provided.
  • The tax information and financial statements certified by the CEO and/or reviewed or audited financial statements of the issuer, as applicable, according to the amount of money sought.
  • A description of any events that would have triggered disqualification under the bad actor disqualification provisions had they occurred after the effective date of the final rules.
  • Updates on progress toward meeting the target offering amount.
  • A statement regarding where on the issuer’s website investors will be able to find the issuer’s annual report and the date upon which the annual report will be available.
  • A statement declaring whether the issuer or any of its predecessors failed to comply with the ongoing reporting requirements of Regulation CF.
  • Any other material information necessary to make previous statements not misleading.

Other than the information required to be entered into the  XML  portion  of Form C (which covers items such as the issuer’s name, address, and size of offering), the SEC does not specify the format or medium in which the mandatory disclosure must be presented, leaving flexibility for crowdfunding  issuers  to  present certain information in written offering documents, videos,  and  through  other  graphic  means.

In response to suggestions made during the comment process, the SEC included an optional Question and Answer (“Q&A”) format that an issuer can follow to provide the mandatory disclosure not covered in the XML portion of the form. While this might assist some issuers that have not sought professional advice to make sure that they do not miss any important items, the Q&A itself is quite technical. See at pp. 164-184.  Since the Q&A section is optional, the Portal will not require that any issuer complete it.  Completion of the Q&A section is at the discretion of the issuer.

All information about an offering posted on the Portal’s website must be filed with the SEC via EDGAR. All of the issuer’s offering materials of every type and sort must be filed first before they are posted with required disclosures.  While data can be filed in PDF format through EDGAR for these offerings (not permitted for other types of SEC filings) video and audio cannot be filed  through  EDGAR;  therefore,  a  transcript  is required.  To that end, an issuer can create a free or cheap machine-based or human-created transcript of any video or audio recording and file it along with the Form C.

Form C Financial Statements and Financial Requirements – Required by the Portal

An issuer conducting an offering in reliance on Regulation Crowdfunding will also be required to include financial statements, prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”), in its offering statement. The financial statements must cover the two most recently completed fiscal years, or the period since the issuer’s inception, if shorter.

An issuer generally must disclose audited (not required if it is the issuer’s first crowdfunding raise  or if the issuer is registered with the  Public Company Accounting Oversight Board) or reviewed  (in accordance with Statements on Standard for Accounting and Review Services promulgated by the AICPA) financial statements if available.

For smaller fundraising amounts, where a principal executive officer is required to make certifications, he or she shall certify that the disclosure of the amount of total income, taxable income and total tax accurately reflects the information in the issuer’s federal income tax returns.  Further, the officer must certify that the financial statements are true and complete in all material respects.

However, the minimum level of financial statement disclosure will depend on the aggregate amount of securities offered and sold in reliance on Regulation Crowdfunding during the preceding 12-month period as follows:

  • Offerings of $124,000 or less. US GAAP financial statements for the two most recently completed fiscal years or shorter period during which the issuer has been operating, certified true and complete by the issuer’s principal executive officer and the amount of total income, taxable income, and total tax as reflected in the issuer’s federal income tax returns for the most recently completed fiscal year (if any), also certified true and complete by the issuer’s principal executive officer. If the issuer has financial statements that have been reviewed or audited by an independent public accountant, the issuer must include those financial statements instead and will no longer be required to include its tax return information or certification from its principal executive officer.
  • Offerings of more than $124,000 but not more than $618,000. US GAAP financial statements reviewed (in accordance with AICPA standards) by a public accountant independent of the issuer under Rule 2-01 of Regulation S-X (17 CFR Part 210) (§§ 210.1-01 – 210.1-02), and accompanied by the accountant’s review report. If the issuer has audited financial statements, it must include those instead. The Portal has a list of professionals that an issuer can hire to perform the exact accounting review service required.
  • Offerings over $618,000. The first time an issuer conducts an offering of more than $618,000 but not more than $1.235 million under Regulation Crowdfunding, it will be subject to the same financial statement requirements as issuers raising more than $124,000 but not more than $618,000—that is, the CPA accountant review for Crowdfunding offerings. The Portal has a list of independent professionals that an issuer can hire to perform the exact accounting review service required.

However, for issuers that have previously sold securities in reliance on Regulation Crowdfunding, the issuers must provide US GAAP financial statements audited (in accordance with AICPA or PCAOB standards) by an independent auditor, accompanied by the audit report.

The financial statements are not permitted to be more than eighteen months old.  If more than 120 days have passed since the end of the most recent fiscal year, the issuer has to produce financial statements for that most recent year, but until that point financial statements from the preceding year can be used.  No interim financials are required.

The review standards to be used by the accountant are the Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.  The SEC does not exempt early-stage  companies from these requirements. Thus, even a company at the business plan stage seeking more than $100,000 would have to produce financial statements reviewed by a CPA.

An issuer is also required to provide on Form C a narrative discussion of its financial condition covering, among other things, its historic results of operations and liquidity and capital resources, which the Portal understands is expected to be similar to a MD&A, but generally not as lengthy or detailed considering the more limited operating history, complexity and scale of likely crowdfunding issuers.

If the issuer conducts the offering between the issuer’s inception and 120 days after the issuer’s first annual balance sheet date, the issuer may include a balance sheet as of its inception date instead of a balance sheet as of its first fiscal year end. However, for an offering conducted more than 120 days after the issuer’s first annual balance sheet date, the date of the most recent annual balance sheet determines the period for which statements of comprehensive income, cash flows and changes in stockholders’ equity must be provided.

Ongoing Reporting Obligations, as Applicable

Crowdfunding issuers will be subject to ongoing reporting requirements under Section 4A(b)(4) of the 1933 Act and Rule 202 of Regulation Crowdfunding.  Issuers will need to file a report with the SEC annually, no later than 120 days after the end of the most recently completed fiscal year covered by the report, and the report also must be posted to the issuer’s website. The annual report must contain information similar to that required in the offering statement, including disclosure about the issuer’s financial condition.  The rules require financial statements of the issuer included in the annual report to be certified by the principal executive officer as true and complete in all material respects, although an issuer that has financial statements that have been reviewed or audited by an independent certified public accountant must provide them instead.

The Portal has a list of independent professionals the issuer can hire to ensure compliance with this obligation.

Form C-A: Amendment

Issuers are required to amend the Form C disclosures for any material change in the offer terms or disclosure previously provided to investors. Issuers can amend previous Form C filings by filing a new Form C and checking the “Form C-A: Amendment” box on the cover.

If any change, addition or update constitutes a material change, the issuer would need to check the box indicating that investors must reconfirm their investment commitments within a five business day period.

Issuers may also voluntarily file a Form C-A to make immaterial changes and in those cases would not check the box indicating that investors must reconfirm their investments.

Form C-U: Progress Update

During the fundraising process, issuers must prepare a couple of regular updates on their progress in meeting the target offering amount, or can simply rely on the Portal to issue progress updates as to the amount of funding achieved for the offering. Issuers can do so by filing a Form C and checking the “Form C-U: Progress Update” box on the cover.  If the issuer hires a professional to prepare its Form C, this professional can also prepare its Form C-U Progress Update.

Updates are required no later than five business days after the issuer has received commitments for 50% of the targeted offering amount and again no later than five business days after receiving commitments for 100% of the targeted offering amount. If the issuer will accept proceeds in excess of the target offering amount, it must also file a Form C-U no later than five business days after the offering deadline, disclosing the total amount of securities sold in the offering.

If multiple Forms C-U are triggered within the same five business day period, the issuer can consolidate the updates into one Form C-U as long as it discloses the most recent threshold that was met and file and provide to the intermediary no later than the day on which the first progress update is due.

Rule 203(3)(iii) permits issuers to satisfy the progress update requirements by relying on the relevant portal to make frequent updates about the issuer’s progress toward meeting the target offering amount publicly available on the portal’s platform. However, if the portal does not provide these updates, the issuer is required to file the interim progress updates. In addition, if relying on Rule 203(3)(iii), the issuer must still file a Form C-U at the end of the offering to disclose the total amount of securities sold offering.

Form C-AR: Annual Report

Each issuer that sold securities in reliance on Regulations Crowdfunding is required to file with the SEC and post to its website an annual report within 120 days of the end of each fiscal year. On this filing the issuer would check the “Form C-AR: Annual Report” box.

This annual report is required to include information similar to the offering statement on Form C, including financial statements certified by the principal executive officer and the narrative disclosures of its financial condition, but excluding offering-specific information.

However, issuers that have financial statements that have been reviewed or audited by an independent certified public accountant because they prepare them for other purposes must provide them and will not be required to have the principal executive officer certification.

Regardless of the amount raised under Regulation Crowdfunding, however, Form C-AR does not require reviewed or audited financial statements from issuers that do not prepare those statements for other purposes.

The annual reporting requirement continues until one of the following events occurs:

  • The issuer becomes a reporting company.
  • The issuer has filed at least one annual report on Form C-AR and has fewer than 300 holders of record.
  • The issuer has filed at least three annual reports and has total assets of no more than $10 million.
  • All the issuer’s securities sold under Regulations Crowdfunding are purchased by a third party or repurchased by the issuer.
  • The issuer liquidates or dissolves its business under state law.

Form C-TR: Termination of Reporting

When an issuer is no longer subject to the ongoing annual reporting requirement, it can terminate its reporting obligations by filing a Form C and checking the “Form C-TR: Termination of Reporting” box on the cover within five business days from the date of the terminating event.

When calculating the number of holders of record for purposes of determining eligibility to terminate its duty to file ongoing reports under Rule 202(b)(2) of Regulation Crowdfunding, an issuer must count all holders of record of securities of the same class of securities issued in the Regulation Crowdfunding offering for which the reporting obligation exists, regardless of whether the holders of record purchased their securities in the Regulation Crowdfunding offering. See SEC Regulation Crowdfunding Compliance and Disclosure Interpretations, Question 202.01.

Issuer Requirements to Engage in Crowdfunding Transactions

In order to engage in crowdfunding transactions, issuers must meet the eligibility criteria under Regulation Crowdfunding of the Securities Act. Given that the purpose of Regulation Crowdfunding of the Securities Act is to “facilitate capital formation by early stage companies that might not otherwise have access to capital,” the SEC excluded certain categories of issuers from relying on the crowdfunding exemption. Some issuers that are excluded are those that:

  • are foreign companies;
  • are subject to Exchange Act reporting requirements;
  • are investment companies under the Investment Company Act of 1940 (the “Investment Company Act”) or companies that are not considered investment companies under Section 3(b) or 3(c) of the Investment Company Act;
  • are disqualified as a “bad actor” (see the bad actor disqualification provisions for Rule 506(d) and (e) of Regulation D under the Securities Act of 1933);
  • have relied on Regulation Crowdfunding of the Securities Act and not met certain annual reports filing requirements
  • have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition; and
  • are excluded as deemed appropriate by the SEC.

What follows are the various requirements and obligation Reg CF imposes on issuers that are eligible to engage in crowdfunding transactions:

The Portal Will Review Form Cs Provided by Issuers

All filings with the SEC under Reg CF must be made on Form C: Offering Statement (“Form C”). Form C allows issuers to check the appropriate box to designate the purpose of a particular Form C filing. This includes: (1) disclosures about the offering, (2) amendments and (3) progress updates. Issuers are required to provide filed Forms C to the Portal and make them available to investors.   Amendments and progress updates will be reviewed by the Portal for consistency and compliance.

The Portal Will Review Disclosures Made by Issuers

Under Rules 201 and 203 of Reg CF, issuers must make certain disclosures to investors, including potential investors, and the relevant intermediary. These disclosures, which are to be filed with the SEC through Form C, cover a wide range of information, and include:

  • Issuer Information
    • General business information;
    • Names and experience of directors and officers;
    • Names of each person who is a beneficial owner of 20% or more of the issuer’s outstanding voting equity securities;
    • Financial condition and financial statements;
    • Ownership and capital structure;
    • Number of employees; and
  • Offering Information
    • Purpose and intended use of the proceeds of the offering;
    • Target offering amount, the deadline to reach that amount and regular updates on the progress of the issuer in meeting that amount (progress updates may be made publicly available on the intermediary’s platform to meet this requirement);
    • Whether issuer would accept investments in excess of target amount, and if so, the maximum amount it would accept;
    • Total amount of securities sold;
    • If an offering is oversubscribed, how shares would be allocated; o Process to cancel an investment commitment or to complete transaction once target amount is met; and o Offering price or method of determining the offering price of the securities; o Location of the issuer’s annual report and date of its availability on the issuer’s website.
  • Intermediary Information
    • Identity of the intermediary, including its name, SEC file number and CRD number (if applicable);
    • Compensation paid to the intermediary, or if the exact amount is unavailable at time of filing, a good faith estimate of the compensation to be paid; and
    • Direct or indirect interest in the issuer held by the intermediary, or any arrangement to acquire and interest.
  • Risk-Related Information
    • Legends about the risk of investing in a crowdfunding transaction; and
    • Risk factors of investing in the issuer’s offering, which are tailored to the issuer’s business.
    • Prior Transactions o Exempt offering conducted by the issuer within the past three years;
    • Failure to previously comply with any ongoing reporting requirements of Reg CF; and
    • Related-party transactions between the issuer and any director or officer of the issuer, any person who is a beneficial owner of 20 % or more of the issuer’s outstanding voting securities, any promoter of the issuer (if the issuer was incorporated or organized within the past three years), or immediate family members of the foregoing persons. These disclosures are limited to related-party transactions in excess of 5% of the amount raised by the issuer under the crowdfunding exemption in the previous 12 months, including the amount of the current Regulation Crowdfunding offering.
  • Miscellaneous
    • Any material information to make statements not misleading; and
    • Any additional disclosures required by the SEC for investor protection and in the public interest.

The Portal’s Review Upon Material Amendments to Form C

Under Rule 203 of Reg CF, an issuer must amend Form C upon a material change in (1) the terms of the offering or (2) previous disclosures to the investors. A “material change” means a change in information, which under the facts and circumstances, “a reasonable investor would consider . . . important in deciding whether or not to purchase the securities.”

Examples of material changes that require an issuer to amend Form C include material changes in (1) the issuer’s financial condition, (2) the use of proceeds from the offering and (3) the determination of the final price of the securities offered. This rule is consistent with SEC’s historical approach of offering minimal guidance on materiality determinations and adopting a “facts-and-circumstances” standard.

Amendments to Form C must be filed with the SEC and provided to the intermediary and the investors. While issuers must provide the intermediary with a copy, they may provide information to investors electronically by referring investors to the information on the intermediary’s platform through e-mail or a posting on the issuers’ websites. Upon receipt, investors have five business days to reconfirm their commitment to invest through the offering.

The Portal Will Ensure Issuers Post Ongoing Reporting to Its Website

Annual Reports. Under Rule 202 of Reg CF, issuers that have sold securities under the crowdfunding exemption must file annual reports with the SEC within 120 days following the end of the relevant fiscal year. Annual reports must include any information required in Form C that is not offering-specific. While an issuer is also required to post annual reports on its website, it is not required to notify or physically deliver annual reports to investors.

Financial Statements. Under Rule 202 of Reg CF, issuers must provide financial statements on an ongoing basis. Generally, issuers are permitted to provide financial statements certified by the principal executive officer, unless they have already prepared financial statements that are audited or reviewed by an independent certified public accountant, in which case those statements must be provided. Unaudited financial statements must be labeled as unaudited.

The financial statements must include balance sheets, statements of comprehensive income, statements of cash flows, statements of changes in stockholders’ equity and notes related to the financial statements. Specific requirements for financial statements also vary depending on the target offering price and for issuers engaging in their first Regulation Crowdfunding offering:

  • Offerings of $124,000 or less:
    • Principal executive officer of the issuer must certify that the financial statements are true and complete in all material respects.
    • Issuer must disclose total income, taxable income and total tax, and have a principal executive officer certify that those amounts match the issuer’s federal income tax returns.
  • Offerings of more than $124,000 but not more than $618,000:
    • Issuers must file and provide reviewed financial statements.
  • Offerings of more than $618,000:
    • Issuers must provide audited financial statements.
    • Issuers engaging in their first 4(a)(6) offering are permitted to provide reviewed financial statements, unless audited financial statements are available.

Due Diligence Check for Issuers Seeking to Place an Offering on the Portal’s Platform

For any given company seeking to become an issuer placing an offering on the Portal’s platform, the following due diligence will be conducted by the Portal’s due diligence team or a service bureau on behalf of the Portal, including the following:

  • Address of business
  • Registered Agent for Service of Process
  • Type of company, date incorporated, state of incorporation.
  • Whether company is in good standing with the state in which it is incorporation.
  • Confirm authorized number of shares and issued number of shares
  • Confirm valid and applicable copy of bylaws
  • Confirm identity and appointment dates of directors and officers
  • Confirm the company is duly authorized to list an offering of shares or other securities on the Portal.
  • Confirm representation of the company by applicable professionals; for instance, representation by a particular accounting firm or law firm.
  • Confirm current capitalization table or current ownership.
  • Confirm whether company has subsidiaries.
  • Confirm who founded the company and the identity of key personnel.
  • Confirm employment agreements between key personnel and company.
  • Confirm identity of advisors to the company.
  • Bad actor check – confirm there are no company associated persons who would be considered a bad actor pursuant to Regulation Crowdfunding.
  • Confirm relevant education by officers and directors if touted as material.
  • Confirm employment history of officers or directors if touted as material.
  • Confirm whether company has sought to raise money through Regulation CF before.
  • Confirm factual aspects of company’s business plan. Confirm the description meets regulatory requirements.
  • Confirm lease information for company office and/or any facilities or properties.
  • Confirm whether company’s representation regarding litigation is truthful.
  • Confirm ownership of any web properties or websites
  • Confirm existence of insurance, if necessary.
  • Confirm existence of any patents, if necessary.
  • Confirm necessary attributes of financial statements
  • Confirm whether the company is registered to do business in each state in which it plans to or purports to do business.
  • Confirm whether the company holds all applicable licenses and permits to conduct its business.
  • Confirm that the company has filed taxes as required.
  • Confirm whether representations regarding the nature of the security being offered are truthful.
  • Confirm whether company is aware of state law and ongoing crowdfunding reporting requirements.
  • Confirm identity and legitimacy of company’s chosen stock transfer agent and that it has agreed to serve as stock transfer agent for the company.
  • Confirm identity, type and amounts held in any bank account company identifies and existence of lack of existence of debt obligations to bank(s).
  • Confirm whether company has provided their Form C to the SEC on the relevant date.
  • Potentially, name, address, social security or tax id number, phone number and email address of every officer, director and 10%+ shareholder (including options or warrants).

Eligible and Ineligible Issuers and Bad Actors – Criteria for Excluding Potential Offerings

Only issuers eligible to be exempt from registration under Regulation Crowdfunding of the Securities Act will be allowed to engage in crowdfunding transactions on the Portal and such issuers will be limited to raising a maximum of $1,070,000 in a 12-month period.  Issuers that will be excluded from the Portal include (pursuant to Sections 4(a)(6) and 4A(f) of the Securities Act):

  • Non-U.S. companies;
  • Companies that are disqualified under Regulation Crowdfunding disqualification rules (modeled on, and substantially similar to, the Rule 506(d) “bad actor” rules under Regulation D);
  • Investment companies and private funds (and companies excluded from that definition by Sections 3(b) and (c) of the Investment Company Act (including most hedge funds)).
  • Companies that are reporting companies under the Securities Exchange Act of 1934, as amended (“1934 Act”);
  • Companies that are delinquent in filing the ongoing reports required by Regulation Crowdfunding; and
  • Companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.
  • Companies that failed to make required Form C filings in the two years before a crowdfunding offering (though the exemption becomes available again once the issuer makes any missed filings).

Virtually any other type of enterprise can raise capital through crowdfunding on the Portal, and there are no restrictions limiting the type of securities that may be offered and sold in reliance on Regulation Crowdfunding. The offering to take the form of common stock, preferred stock, another form of equity interest in the issuer, debt, or any other allowable form of equity or debt so long as issuers understand and it is clear to investors, that any securities purchased in a crowdfunding transaction cannot be transferred for one year, subject to certain exceptions.  Further, issuers need to be aware that they do not need to count the holders of these securities when determining whether they meet the 1934 Act thresholds for registration, as long as the issuer is current in its annual reporting obligations, has less than $25 million in assets, and retains the services of a registered transfer agent for shareholder recordkeeping.

With regard to bad actors, the Portal is aware that an issuer is unable to rely on the crowdfunding exemption if any “covered person” was involved in a “disqualifying event.” Covered persons include:

  • The issuer, its predecessors and certain affiliates.
  • Any of the issuer’s directors, officers, general partners or managing members.
  • Any 20% beneficial owner of the issuer (calculated by voting power).
  • Any promoter connected with the issuer at the time of sale.
  • Any compensated solicitor for the offering.
  • Any director, officer, general partner or managing member of a compensated solicitor for the offering.

The disqualifying events covered by the final rules are modeled on those of Rule 262, and include, among other things, certain securities-law related injunctions and restraining orders entered in the last five years and certain regulatory orders entered in the last ten years. Like the Rule 506 disqualification provision, the final rules include an exception for disqualifying events that the issuer did not know of and, in the exercise of reasonable care, could not have known of. Further, Rule 503 contains disqualification provisions similar to Rule 506(d), which disqualifies certain issuers from relying on the Regulation D safe harbor from Securities Act registration (see Practice Note, Section 4(a)(2) and Regulation D Private Placements: Bad Actors Disqualified from Relying on Safe Harbor).

Per Issuer Capital Raising Limitation

The Rules limit the total amount of securities sold by an issuer to all investors under the crowdfunding exemption to $1.235 million during any 12 month period. Only securities sold under Regulation Crowdfunding (and not any other exemption from registration) count toward an issuer’s $1.235 million limit on capital raised through crowdfunding.

In calculating the limit, an issuer is required to add together proceeds raised in Regulation Crowdfunding issuances by the issuer itself, its predecessors and entities it controls or with which it is under common control. The amount of these issuances cannot exceed $1.235 million in any rolling 12-month period.

Intermediaries and Investors

All investors interested in investing through the Portal must open an account with the Portal and consent to the delivery of educational materials and other communications via electronic means.

Educational material the Portal makes available to investors, include:

  • The process for the offer, purchase and issuance of securities and types of securities sold through the intermediary;
  • The risks and restrictions on the amount and resale of securities sold under Regulation Crowdfunding;
  • The types of information that an issuer is required to provide to investors;
  • The issuer’s and investor’s investment commitment-cancellation rights; and
  • The terms of the ongoing relationship between the issuer and intermediary beyond the offering.

The Portal ensures the requisite educational materials are available to investors on the platform and provides current educational materials to investors before accepting any additional investment commitments or conducting any additional Regulation Crowdfunding offerings. In addition to providing this information to investors, the Portal obtains from the investor confirmation that he or she: (1) has reviewed these educational materials, (2) understands that he or she may lose the entire investment and is in a financial condition to bear the loss, and (3) has completed a questionnaire showing that he or she understands the financial risks of the investment and other statutory aspects of Title III.

The Portal ensures that disclose information related to compensation is accurately conveyed where applicable. Specifically, the Portal ensures that investors receive disclosures of compensation from any promoters receiving compensation from an issuer to promote their offering. The Portal also discloses to investors how the intermediary itself is compensated in connection with the Regulation Crowdfunding offerings through its platform.

The Portal must provide potential investors and the SEC any information required to be provided by the issuer under Reg CF Rules 201 and 203(a). This information must be: (1) publicly available in a manner in which a person accessing the platform can save, download, or store the information; (2) made publicly available on the platform for 21 days prior to the sale of any securities in the offering; and (3) remain publicly available until the sale of securities is completed or cancelled. The Portal will not require a potential investor to first establish an account with the intermediary in order to be able to view this information.

The Portal ensures that investors participating in offerings through its platform have not exceeded the statutory limits for aggregate purchases in Regulation Crowdfunding offerings. Similar to the standard for ensuring issuer compliance with relevant statutes and regulations, the Portal holds itself to the standard that it must have a “reasonable basis” for believing each investor complies with all requirements and can rely on an investor’s representations regarding financial status and investment history. The Portal exercises its own discretion in developing their methods for verifying investor compliance and requires each investor to receive education materials, affirm they have been read and received, and then complete a financial quiz before being allowed to invest.  Also, because each and every investment, an investor is required to enter current information about his or her net worth, income, and amount of money invested in Regulation CF offerings in the trailing 12 months.  The logic of the Platform’s website calculates the maximum amount of money the given investor may invest and the investor is informed that this is the maximum amount.  Further, the investor is then limited by protocol to invest no more than the maximum amount in the offering that triggered the investor to make such disclosures about his or her net worth, etc. Given that the SEC provides potential options for investor compliance verification, the Portal’s website acts as a central depository for crowdfunding investments, requires the submission of investor financial information as discussed as well as the completion of a short questionnaire regarding financial understanding.

The Portal ensures each offering is open for public view for 21 days prior to accepting investment.  Additionally, interested investors can add the offering to his or her “watch list” which allows him to keep abreast of offerings in which he is interested.  However, he cannot invest until the offering has been available for public view for 21 days.

Securities issued pursuant to Regulation Crowdfunding are not freely transferrable by the purchaser for one year after the date of purchase. The statutory text outlines four situations in which a transfer may be made prior to the end of the one-year period; the SEC did not significantly alter these provisions in its Rule 501. Prior to the end of one year, transfers may be made, pursuant to 17 C.F.R. §  227.501:

  • to the issuer of the securities;
  • to an accredited investor;
  • as part of an offering registered with the SEC; or
  • to a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser, or in connection with the death or divorce of the purchaser.

The SEC clarified that the transfer restrictions apply to all holders during the one-year period whether they purchased their securities from the issuer or in a secondary transaction. The SEC did not provide  guidance  or  structure  with respect to subsequent trading of crowdfunding securities. However, the JOBS Act preemption of state regulation applies only to the initial offer and sale of securities by the issuer. After the end of the statutory restriction on transfer, investors will likely be able to transfer their securities to someone else without registration at the federal level, in reliance on section 4(a)(1) of the Securities Act. However, subsequent trades must also be made in accordance with state law, and the law varies widely from state to state regarding how securities of nonpublic companies can be resold. Crowdfunding securities will thus be illiquid.

The educational materials for investors contain the following notable attributes:

  1. The process for the offer, purchase, and issuance of securities using the intermediary.
  2. The risks associated with investing in securities offered and sold under Regulation Crowdfunding.
  3. The types of securities that may be offered on the intermediary’s platform and the risks associated with each type of security, including the risk of dilution.
  4. The restrictions on the resale of securities offered and sold under Regulation Crowdfunding.
  5. The types of information that an issuer must provide in annual reports, the frequency of the delivery of that information, and the possibility that the issuer’s obligation to file annual reports may terminate in the future (in which case, an investor may not continually have current financial information about the issuer).
  6. The limitations on the amounts investors may invest.
  7. The circumstances in which the issuer may cancel an investment commitment.
  8. The limitations on an investor’s right to cancel an investment commitment.
  9. The need for the investor to consider whether investing in a security offered and sold under Regulation Crowdfunding is appropriate for that investor.
  10. That following completion of an offering, there may or may not be any ongoing relationship between the issuer and the intermediary.
  11. That any person promoting an issuer’s offering for compensation, whether past or prospective, must clearly disclose in all communications on the platform the receipt of the compensation and the fact that that person is engaging in promotional activities on behalf of the issuer.
  12. The manner in which the intermediary is to be compensated in connection with offerings and sales of securities under Regulation Crowdfunding.

No Restriction on Types of Securities Offered

 There is no restriction on the type of securities that may be offered under Regulation Crowdfunding, allowing debt securities to be issued in crowdfunding transactions in addition to equity securities.

Notes in the adopting release indicate that the Trust Indenture Act of 1939 (codified at 15 U.S.C. §§ 77aaa–77bbbb) in Section 304(b) provides an exemption for any transaction that is exempt under Section 4 of the Securities Act.

Restrictions on Resales

As mandated by Section 4A(e) and under Rule 501, securities sold in a crowdfunding offering cannot be transferred during the one-year period beginning on the date of purchase, unless transferred:

  • To the issuer.
  • To an accredited investor.
  • As part of an SEC-registered offering.
  • To a family member (or trust for the benefit of a family member) of the purchaser, or in connection with the death or divorce of the purchaser or other similar circumstance.

Crowdfunding Securities Exempt from Section 12(g) Stockholder Cap

Section 12(g) of the Exchange Act requires an issuer to register a class of equity securities (making the company a reporting company) when its assets and the number of record shareholders of that class of securities exceed certain thresholds. Rule 12g-6 permanently exempts from the record holder count securities issued in a Regulation Crowdfunding offering, as long as the issuer:

  • Is current in its ongoing annual reports required under Regulation Crowdfunding.
  • Has total assets as of the end of its last fiscal year of no more than $25 million.
  • Has engaged the services of a transfer agent that is SEC-registered pursuant to Section 17A of the Exchange Act.

An issuer seeking to exclude a person from its record holder count has the burden of demonstrating that person’s securities were initially issued in a crowdfunding offering.

Safe Harbor for Insignificant Deviations from Regulation Crowdfunding

Rule 502 provides a safe harbor for issuers that attempt to comply with the Regulation Crowdfunding exemption but fail to do so. To qualify for the safe harbor, the issuer must show that:

  • The failure to comply with a term, condition or requirement was insignificant with respect to the offering as a whole.
  • The issuer made a good faith and reasonable attempt to comply with all applicable terms, conditions and requirements of Regulation Crowdfunding.
  • The issuer did not know of the failure to comply, where the failure was on the part of the intermediary, or the failure by the intermediary occurred solely in offerings other than the issuer’s offering.

The first two prongs of the safe harbor are modeled on a similar provision in Rule 508 of Regulation D.

Liability for Material Misstatements or Omissions

The Portal will insure that issuers are aware of their potential liability for material misstatements or omissions.  An investor in a crowdfunding offering may bring an action against the issuer under Section 4A(c) for rescission or damages. The issuer will be held liable for written or oral material misstatements or omissions in accordance with Section 12(b) and Section 13 of the Securities Act, as if the liability were created under Section 12(a)(2) of the Securities Act.

The issuer has a defense if it can show that it did not know, and in the exercise of reasonable care could not have known, of the misstatement or omission.

For purposes of determining liability in a crowdfunding offering, the term issuer includes any person who:

  • Is a director or partner of the issuer.
  • Is a principal executive officer, principal financial officer, controller or principal accounting officer of the issuer.
  • Offers or sells securities in the offering.

The Portal is aware that the SEC specifically declined to exempt funding portals (or any intermediaries) from the statutory liability provision of Section 4A(c), leaving the door open for investors to bring private rights of action against intermediaries.  The SEC stated that the determination of “issuer” liability for an intermediary under Section 4A(c) will turn on the facts and circumstances of the particular matter in question.

Blue Sky Laws

The JOBS Act amended Section 18(b)(4) of the Securities Act to classify securities sold under Regulation Crowdfunding as covered securities, exempting them from state blue sky registration requirements. However, the JOBS Act did not limit state authorities from taking anti-fraud enforcement action against any broker, dealer, crowdfunding issuer or funding portal using the crowdfunding exemption. Additionally, the JOBS Act did not limit notice filing requirements or filing fee requirements for the state of the issuer’s principal place of business or in which purchasers of 50% or greater of the aggregate amount of the securities issued are residents.

The JOBS Act also provided that a state may only enforce state laws, rules or regulations against a registered funding portal with respect to its business as a funding portal if:

  • The portal’s principal place of business is in that state.
  • The state’s laws, rules and regulations are not in addition to or different from the requirements for registered funding portals established by the SEC.

Restrictions on Promoter Compensation

Rule 205 prohibits the issuer from compensating or committing to compensate, directly or indirectly, any person to promote its Regulation Crowdfunding offerings through the intermediary’s platform, unless the issuer takes reasonable steps to ensure the promoter clearly discloses the past or prospective receipt of compensation with each promotional communication.

These restrictions apply to persons hired specifically to promote the offering, as well as to all issuer employees undertaking promotional activities on behalf of the issuer.

Advertising and Publicity

The Portal is aware that the SEC staff draws a distinction between communications that include the terms of the offering and those that do not. The Rule 204 limitations on advertising apply only when the advertisement includes any of the terms of the offering (see SEC Regulation Crowdfunding Compliance and Disclosure Interpretations, Question 204.03). For example, an issuer can continue to advertise its products or services in the ordinary course of business.

An issuer may also make other communications during a crowdfunding offering that do not refer to the terms of the offering without the Rule 204 limitations. However, the typical SEC rules governing publicity and offers during securities offerings would still apply.

Third parties hired to advertise an issuer’s offering outside of the intermediary’s communication channels also need to comply with the Rule 204 notice requirements. Similarly, a third party publication, such as a media article, would constitute a notice that would subject an issuer to the Rule 204 limitations if the article advertises the terms of the offering and the issuer has been directly or indirectly involved in the preparation of the publication. Because Rule 204 limits the information that may be in such a notice, it would be difficult for the issuer to comply with the rule’s requirements. If the media article did not advertise the terms of the offering, it would not be a notice subject to Rule 204, although it could still constitute an offer under the securities laws (see SEC Regulation Crowdfunding Compliance and Disclosure Interpretations, Question 204.04).

An issuer may “not advertise the terms of the offering, except for notices that direct investors to the funding portal or broker.”

Under the new rules, an issuer and any person acting on behalf of the issuer may publish a limited notice (sometimes called a “tombstone”) that advertises the terms of an offering. The notice must include the Internet address of the intermediary’s platform where information about the issuer and offering may be found. While acknowledging that the statute restricts the ability of potential issuers to advertise, the SEC has explained that restrictions on advertising the terms of the offering are meant to direct the investors to the Portal’s platform.  Crowdfunding, Securities Act Release No. 9974, 80 Fed. Reg. 71387 at 71425.  Once the investors arrive at the Portal’s platform, they have access to the information that allows them to make an informed decision about the offering.

Under the rules, a notice advertising the terms of an offering may contain no more (and may contain less) than:

  • a statement declaring that the issuer is conducting an offering, the name of the intermediary conducting the offering, and a link to the intermediary’s platform;
  • the terms of the offering (the amount of securities being offered, the nature of the securities, the price of the securities, and the closing date of the offering period); and
  • factual information about the legal identity and business location of the issuer, limited to the issuer’s name, address, telephone number, and website, as well as an e-mail address for a representative of the issuer and a brief description of the issuer’s business.

The rules do not place restrictions on the format, the medium, or the method of distribution of the notice. An issuer could therefore place these notices on various social media sites to attract potential investors, directing them to the Portal’s website where potential investors could access the facts necessary to make an informed investment decision.

Issuers may engage third parties to promote the offering both through the communication channels provided by the intermediary and through tombstone notices. Intermediaries are required to create communication channels on their platforms to facilitate discussion between prospective investors and the issuer. Under the rules, an issuer is permitted to communicate with investors and potential investors about the terms of the offering via channels provided by the intermediary through its platform as long as the issuer identifies itself as the issuer in all communications.  Anyone acting on behalf of the issuer must identify their affiliation with the issuer in all communications on the intermediary’s platform.

Further, Regulation CF anticipates an arrangement in which the issuer pays a promoter to respond to investors through those communication channels. The regulation requires that such compensation be disclosed by the promoter within any communication on the platform. Paid promoters should also consider whether the disclosure requirements of section 17(b) of the Securities  Act  apply to them.  Additionally, an issuer may engage a third party to publish tombstone notices that direct viewers to the intermediary’s offering page. In this context, Regulation CF requires that such third-party notices comply with the general limitations on advertisement discussed above.

An issuer is not prohibited from disseminating other information about the company that does not relate to the terms of the offering, such as general business advertising, in the normal course of its business.

Advising Issuers

Portals are permitted to advise an issuer about the structure or content of the offering, which includes preparing the offering documentation. The SEC notes that a funding portal could provide pre-drafted templates or forms to the issuers, and it is permitted to provide advice on the types of securities the issuer can offer, the terms of those securities, and crowdfunding regulations.

Funding portals are required to observe high standards of commercial honor and must not engage in manipulative, deceptive, or other fraudulent devices.  Additionally, Funding Portal Rule 200 prohibits a funding portal from including on its website information from an issuer that the portal knows or has reason to know contains any untrue or misleading statement.

Ongoing Disclosure Requirements

Issuers that have sold securities in reliance on Regulation Crowdfunding must file certain information with the SEC annually and post it on their websites. The annual filing must be made within 120 days of the issuer’s fiscal year-end.    The information included in the annual report is similar to that required in the initial filing, except that, in response to numerous objections to the burden of the originally proposed ongoing reporting, no accountant’s audit or review of the financial statements is necessary.

Regulation Crowdfunding provides five ways for a company to cease filing ongoing reports with the SEC. Annual filing requirements continue until:

  • the issuer becomes a fully reporting registrant with the SEC;
  • the issuer has filed at least one annual report, but has no more than 300 shareholders of record;
  • the issuer has filed at least three annual reports, and it has no more than

$10 million in assets;

  • the issuer or another party purchases or repurchases all the securities sold in reliance on Regulation Crowdfunding; or
  • the issuer ceases to do business.

The ability of an issuer to cease filing if it has 300 or fewer holders of record, or assets not exceeding $10 million, is a modification from the proposed rules.

Termination. Upon the occurrence of certain events under Rule 203 of Reg CF, issuers may terminate their obligation to file annual reports. The following events will terminate this obligation if the issuer:

  • Is required to file reports under Exchange Acts Section 13(a) or 15(d);
  • Has filed at least one annual report and has fewer than 300 equity holders of record;
  • Has filed at least three annual reports and has total assets of $10 million or less;
  • Purchases or repurchases (or another party purchases or repurchases) all of the Regulation Crowdfunding securities; or
  • Liquidates or dissolves

The Portal will maintain a calendar of deadlines for ongoing reporting requirements imposed upon issuers that used the Portal’s platform to place and fund offerings.  If an issuer that has funded an offering on the Portal’s platform fails to comply with such deadline by failing to post the required annual report, the issuer’s contact person or CFO will be reminded within five business days that it is delinquent in its compliance.  If the issuer continues to remain delinquent, further action will be taken.