On May 4, 2020, the SEC adopted certain leverages to Regulation Crowdfunding offerings, providing conditional temporary relief for smaller companies on the suggestion given by members of the SEC’s Small Business Capital Formation Advisory Committee. Under temporary relief, small companies must satisfy certain conditions in addition to the present Reg CF requirements to benefit from the expedited offering. The aid is directed majorly towards the timing of the offering and the availability of financial statements effective May 4, 2020, through March 1, 2021, and will apply only to offerings initiated between May 4, 2020, and August 31, 2020
Release No. 33-10781 of the SEC mentions that the small businesses are facing difficulties raising money in the current situation, and relaxing Reg CF regulations will fulfill their urgent capital requirements without compromising investors’ interests. They can make use of the internet to reach out to their customers and local community members as potential investors besides their existing investors. These temporary rules also provision issuers to assess interest in Reg CF before deciding to go for a complete offering. There is an exemption on certain financial statements for issuers offering more than $107,000 and less than $250,000 within 12 months.
The following table summarizes the current rules and today’s temporary amendments:
| Requirement | Existing Regulation Crowdfunding | Temporary Amendment |
| Eligibility | The exemption is not available to: • Non-U.S. issuers; • 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. |
To rely on the temporary rules, issuers must meet the existing eligibility criteria PLUS: • The issuer cannot have been organized and cannot have been operating less than six months prior to the commencement of the offering; and • An issuer that has sold securities in a Regulation Crowdfunding offering in the past, must have complied with the requirements in section 4A(b) of the Securities Act and the related rules. |
| Offers permitted | After filing of offering statement (including financial statements) | After filing of offering statement, but financial statements may be initially omitted (if not otherwise available) |
| Investment commitments accepted | After filing of offering statement (including financial statements) | After filing of offering statement that includes financial statements or amended offering statement that includes financial statements |
| Financial statements required when issuer is offering more than $107,000 and not more than $250,000 in a 12- month period | Financial statements of the issuer reviewed by a public accountant that is independent of the issuer | Financial statements of the issuer and certain information from the issuer’s Federal income tax returns, both certified by the principal executive officer |
| Sales permitted | After the information in an offering statement is publicly available for at least 21 days | As soon as an issuer has received binding investment commitments covering the target offering amount (note: commitments are not binding until 48 hours after they are given) |
| Early closing permitted | Once target amount is reached if: • The offering remains open for a minimum of 21 days; • The intermediary provides notice about the new offering deadline at least five business days prior to the new offering deadline; • Investors are given the opportunity to reconsider their investment decision and to cancel their investment commitment until 48 hours prior to the new offering deadline; and • At the time of the new offering deadline, the issuer continues to meet or exceed the target offering amount. |
As soon as binding commitments are received reaching target amount if: • The issuer has complied with the disclosure requirements in temporary Rule 201(z); • The intermediary provides notice that the target offering amount has been met; and • At the time of the closing of the offering, the issuer continues to meet or exceed the target offering amount. |
| Cancellations of investment commitments permitted | For any reason until 48 hours prior to the deadline identified in the issuer’s offering materials. Thereafter, an investor is not able to cancel any investment commitments made within the final 48 hours of the offering (except in the event of a material change to the offering). | For any reason for 48 hours from the time of the investor’s investment commitment (or such later period as the issuer may designate). After such 48 hour period, an investment commitment may not be cancelled unless there is a material change to the offering. |
- Eligibility requirements: The SEC has outlined specific additional requirements in addition to the existing eligibility criteria in Reg CF. The business must be in operation six months prior to the commencement of the Reg CF offering. The change is adopted to facilitate additional funds to the existing business and to mitigate risk to investors. The temporary rule changes will not apply to issuers who sold securities earlier and did not comply with Section 4A(b) of the Securities Act.
- Relief from certain financial information: Before raising funds through Regulation Crowdfunding, the issuer must submit an offering statement on Form C along with the financial statements to the SEC and provide it to the intermediary. The intermediary here can either be a registered broker-dealer or a funding portal. However:
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- Under temporary relief, the issuer does not have to submit the financial statements required by Rule 201(t) and can choose to disclose the financial statements in the amended Form C. However, there will be restrictions on accepting investment commitments until the financial report is submitted.
- Increased threshold value will allow issuers to submit principal executive certified financial statements and certain information from their Federal income tax returns, which otherwise must be reviewed by a public accountant, independent of the issuer.
- Temporary relief from timing requirement: All the offerings initiated between May 4, 2020, and August 31, 2020, will not be required to meet the minimum 21-day obligation, where usually the issuer’s information must be available on the intermediary’s platform for at least 21 days before any securities are sold. Under the right to cancel, offerings under temporary rules will not be allowed to close within the first 48 hours. Another important interim rule to consider here is that the investors will be allowed only 48 hours to cancel their investment commitment unless there is a change in the offering terms or the information provided by the issuer. The issuer will also be allowed to close the offering at an earlier date if they meet or exceed the target offering amount, provided they release a description of the process and statement highlighting the points as given in the SEC release.
The SEC concludes that the temporary rules will facilitate capital formation for eligible issuers without compromising investors’ interest through new rule formation, including the tailoring of the relief (e.g., the eligibility requirements) and the modest size of the Regulation Crowdfunding market. Besides this, issuers can offer Reg CF only through registered crowdfunding intermediaries, which remain subject to Commission and FINRA oversight.
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