By Logan Childress
In normal years, there many accessible sources of capital for small business owners. But, as we all know, 2020 and 2021 have been anything but normal. And the pandemic is continuing to have far-reaching effects. Small businesses are continuing to feel the pressures of closures and safety measures intended to flatten the curve and slow the spread of COVID-19.[1] And, making matters worse, small businesses are finding it more complicated to raise funds due to uncertainty and volatility resulting from the pandemic.[2] Thankfully, in an attempt to address some of the challenges faced by small businesses, the Commission adopted temporary final rules on May 4, 2020, to allow quicker access to urgently needed capital in a timely and cost-effective manner.[3] The temporary final rules provided “flexibility for eligible issuers to assess interest in a Regulation Crowdfunding offering before preparation of full offering materials, and then once launched, to close such an offering and have access to funds sooner than would be possible in the absence of the temporary relief.”[4]
What is Regulation Crowdfunding?
Regulation Crowdfunding is a relatively new funding method.[5] It allows the general public to invest during the early stages of a business without having to be an accredited investor, which is a usual requirement imposed by other private placement exemptions under the United States securities laws.[6] Because the requirement of being an accredited investor is relaxed, the SEC attempts to protect investors by limiting the amount of funds that can be raised and invested through Regulation Crowdfunding to $1.07 million during a 12-month period.[7] Further, each Regulation Crowdfunding offering must be exclusively conducted on an online platform.[8] And the intermediary operating the online platform must be a broker-dealer or a funding portal that is registered with the SEC and FINRA.[9] Finally, in normal years, there are certain disclosure and reporting requirements for the issuers.[10] Pre-COVID-19, an issuer that offers securities through Regulation Crowdfunding must file with the SEC an offering statement on the Form C.[11] Further, Form C requires disclosure of certain business and financial information of the issuer with the initial Form C filing.[12]
What is the Temporary Relief?
The Commission temporarily amended Rules 100, 201, 301, 303, and 304 of Regulation Crowdfunding and Form C under the authority found in the Securities Act.[13] This generally means that the SEC’s temporary rule relaxed certain financial information and timing requirements for these offerings.[14] The temporary rules allow an issuer to omit the financial information required in its initial Form C filing with the SEC (to the extent that such information is not available at the time of its initial filing) and commence its offering.[15] However, please note, that the financial information is required to be included in a subsequent amendment to the Form C filing and provided to investors and the intermediary before the intermediary accepts any investment commitments in the offering.[16]
Additionally, the intermediary is not required to comply with the usual 21-day requirement imposed on Regulation Crowdfunding offerings.[17] Instead, the intermediary has to make the required issuer information publicly available on the intermediary’s online platform before any securities are sold in the offering, but only if the issuer has provided the required financial information.[18]
Are There Conditions to the Temporary Relief?
Yes. To rely on the temporary relief, a company must meet the existing eligibility requirements for Regulation Crowdfunding and:
- The issuer cannot have been organized and cannot have been operating for less than 6-months before the start of the offering; and
- An issuer that previously sold securities in a regulation crowdfunding offering must have complied with the requirements in 15 U.S.C. 77d-1(b) (“Section 4A(b)”) of the Securities Act and the related rules.[19]
There is also a requirement to provide “clear disclosure to investors with respect to the issuer’s reliance on such relief.” [20] In other words, this means that an issuer relying on the temporary relief must provide prominent disclosures in its Form C that the offering is being conducted on an expedited basis due to circumstances relating to the COVID-19 pandemic and under the SEC’s temporary regulatory relief.[21]
Of course, this blog post is only a summary of some important features of Regulation Crowdfunding and the temporary relief. If you are a small business owner considering regulation crowdfunding, the temporary final rules apply to securities offerings initiated under Regulation Crowdfunding until February 28, 2021.[22] Regulation crowdfunding will still be available after February 28, but all requirements will be back in place.[23]
[1] Temporary Amendments to Regulation Crowdfunding; Extension, 85 Fed. Reg. 54,483, 54,483 (Aug. 31, 2020); see, e.g., MetLife & U.S. Chamber of Commerce, Special Report on Coronavirus and Small Business (April 3, 2020).
[2] See Jamie Herzlich, Small Business: COVID-19 Makes Raising Capital Harder, Newsday (June 28, 2020, 6:00 AM), https://www.newsday.com/business/jamie-herzlich-angel-investors-covid-19-1.46108235.
[3] Temporary Amendments to Regulation Crowdfunding; Extension, 85 Fed. Reg. at 54,484.
[4] Id.
[5] Max Crawford, Regulation Crowdfunding 101 For Entrepreneurs, StartEngine (Jan. 24, 2019),https://www.startengine.com/blog/regulation-crowdfunding-101-for-entrepreneurs.
[6] The SEC Has Provided Temporary COVID-19 Relief from Certain Requirements of Regulation Crowdfunding, but Will It Make Securities-Based Crowdfunding a More Attractive Fundraising Option?, Black Rome (May 26, 2020), https://www.blankrome.com/publications/sec-has-provided-temporary-covid-19-relief-certain-requirements-regulation.
[7] Id.; Crawford, supra note 5.
[8] Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, SEC (Apr. 5, 2017), https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm.
[9] Id.
[10] The SEC Has Provided Temporary COVID-19 Relief from Certain Requirements of Regulation Crowdfunding, but Will It Make Securities-Based Crowdfunding a More Attractive Fundraising Option?, Black Rome (May 26, 2020), https://www.blankrome.com/publications/sec-has-provided-temporary-covid-19-relief-certain-requirements-regulation.
[11] Id.
[12] Id.
[13] Temporary Amendments to Regulation Crowdfunding; Extension, 85 Fed. Reg. at 54,490.
[14] See Press Release, SEC, SEC Provides Temporary, Conditional Relief to Allow Small Businesses to Pursue Expedited Crowdfunding Offerings (May 4, 2020).
[15] The SEC Has Provided Temporary COVID-19 Relief from Certain Requirements of Regulation Crowdfunding, but Will It Make Securities-Based Crowdfunding a More Attractive Fundraising Option?, Black Rome (May 26, 2020), https://www.blankrome.com/publications/sec-has-provided-temporary-covid-19-relief-certain-requirements-regulation.
[16] Id.
[17] Id.
[18] Id.
[19] Temporary Amendments to Regulation Crowdfunding; Extension, 85 Fed. Reg. at 54,484.
[20] Id.
[21] Brian Bloomer & Albert Vanderlaan, SEC Provides Temporary Relief from Certain Regulation Crowdfunding Requirements in Response to COVID-19, JD Supra (May 28, 2020), https://www.jdsupra.com/legalnews/sec-provides-temporary-relief-from-14594.
[22] Temporary Amendments to Regulation Crowdfunding; Extension, 85 Fed. Reg. at 54,483.
[23] See Temporary Amendments to Regulation Crowdfunding; Extension, 85 Fed. Reg. at 54,483.
Image Source: “Crowdfunding” by Rocío Lara is licensed under CC BY-SA 2.0, https://search.creativecommons.org/photos/8fbbf111-9dbd-4358-ac53-3e3f3fa0d3ea.