Over the past few years, crowdfunding websites have become an increasingly significant source of consumer feedback and funding for fashion companies as fashion-specific sites such as Betabrand and general sites such as Kickstarter have allowed designers to prescreen new designs and raise funding from interested users. In some cases, supporters of a company will be asked to provide contributions for which the contributors will generally receive some form of gift or other recognition. In other cases, supporters will be asked to preorder a particular item, but only if the funding goal is met will the item go into production.
However, until recently restrictions under the federal and state securities laws have prevented fashion and other companies from raising funds in securities offerings on the internet unless the offerings were registered with the securities authorities or were limited to institutional or wealthy individual investors.
In October 2015, the Securities and Exchange Commission (“SEC”) adopted final rules that will permit ordinary investors to participate in internet-based crowdfunded securities offerings.
The final rules, which will be effective commencing in May 2016, will:
- Permit a non-public U.S. company (other than an investment company or a shell company) to raise a maximum aggregate amount of $1 million through crowdfunding offerings – in a 12-month period;
- Require that the offering be conducted through a registered broker dealer or funding portal;
- Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
- The greater of $2,000 or 5% of the lesser of their annual income or net worth – if either their annual income or net worth is less than $100,000; or
- 10% of the lesser of their annual income or net worth – if both their annual income and net worth are equal to or more than $100,000.
- During the 12-month period, the aggregate amount of securities sold to a particular investor through all crowdfunding offerings may not exceed $100,000.
Companies that rely on the crowdfunding rules to conduct a crowdfunding offering will be required to file certain information with the SEC and provide this information to investors and the intermediary facilitating the offering, including among other things:
- A description of the business and the use of proceeds from the offering;
- The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
- A discussion of the company’s financial condition;
- Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor;
- Information about officers and directors as well as owners of 20 percent or more of the company; and
- Certain related-party transactions.
In addition, companies relying on the crowdfunding exemption will be required to file an annual report with the SEC and provide it to investors that contain information similar to that in the initial disclosure statement.
Each issuer will need to evaluate whether the initial and ongoing costs of a crowdfunding offering make this an attractive capital raising method in light of the amount to be raised and other available funding alternatives. For some issuers a crowdfunding offering will be a useful method to raise funds and to begin to establish a committed shareholder base with the goal of eventually becoming a full public company.
Credit: R. Brian Brodrick
Brian is a partner in Phillips Nizer’s Corporate Law and Securities & Private Placement Practices.