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Finra and SEC Investor Education  

Crowdfunding and the JOBS Act: What Investors Should Know

 

FINRA is issuing an update to this Alert to advise investors about the inflation-adjusted increase in investment limits for securities-based crowdfunding. The Jumpstart Our Business Startups Act (JOBS Act) established crowdfunding provisions that allow early-stage businesses to offer and sell securities and provided that crowdfunding dollar limits be adjusted for inflation every five years. The SEC issued inflation-adjusted crowdfunding dollar amounts on May 5, 2017, which are reflected below.

“Crowdfunding” generally refers to the use of the Internet by small businesses to raise capital through limited investments from a large number of investors. Under SEC rules, the general public can invest in capital raising by start-up companies. This advisory is designed to help the public understand the crowdfunding rules and processes so they can make informed decisions about the risks and rewards of investing in these early-stage businesses.

What Are the Rules?

Title III of the JOBS Act established crowdfunding provisions that allow early-stage businesses to offer and sell securities. The SEC subsequently adopted Regulation Crowdfunding to implement the crowdfunding provisions of the JOBS Act. The role of the Financial Industry Regulatory Authority (FINRA) is to oversee the registration of crowdfunding portals and to ensure that they comply with the federal securities laws and FINRA rules. Broker-dealers and funding portals that are registered with the SEC and are FINRA members are permitted to offer and sell securities on behalf of issuers to the investing public using crowdfunding.

Investors are subject to investment limits that we describe below. Investors should be aware that crowdfunding investments carry significant risk: you can lose some or all of your investment.

Who Can Invest?

Like stocks and bonds, anyone can invest in crowdfunding offerings. But because of the risks involved, you are limited in how much you can invest during any 12-month period in these kinds of securities. The inflation-adjusted investment limits depend on your net worth and annual income:

  • If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or five percent of the lesser of your annual income or net worth. 
  • If both your annual income and your net worth are equal to or more than $107,000 then, during any 12-month period, you can invest up to 10 percent of your annual income or net worth, whichever is less, but not to exceed $107,000. 

Say your annual income is $150,000 and your net worth is $80,000. JOBS Act crowdfunding rules allow you to invest the greater of $2,200 or five percent of $80,000 ($4,000) during a 12-month period. So in this case, you can invest $4,000 over a 12-month period.

Know Your Net Worth

To calculate your net worth, add up all your assets and subtract your liabilities. The resulting sum is your net worth. To learn more, read FINRA’s Know Your Net Worth, which includes a worksheet to help with your net worth computation. For purposes of JOBS Act crowdfunding, the value of your primary residence is not included in your net worth calculation.  

When you calculate your annual income or net worth, you may include your spouse’s income or assets even if those assets are not held jointly. However, if you use a joint calculation, you and your spouse’s aggregate investment may not exceed the limit that would apply to an individual investor at that income and net worth level. 

How to Invest

In addition to investment limits described above, other requirements and procedures have been put in place to protect and inform those who invest in crowdfunding offerings. 

Among the most important, you can invest in an offering pursuant to Regulation Crowdfunding only through an online platform of a broker-dealer or a funding portal, a new type of intermediary that was created by the JOBS Act. Companies may not offer crowdfunding investments to you directly—they must use a broker-dealer or funding portal. 

The broker-dealer or funding portal must be registered with the SEC and be a member of FINRA. To check registration status and additional information on broker-dealers, visit FINRA’s BrokerCheck. To check if a funding portal is registered, go to FINRA’s Funding Portals Web page.

To begin the investment process, you will have to use a new or existing account with the broker-dealer or funding portal. While brokers can offer investment advice and recommendations, funding portals cannot. Also, a funding portal cannot solicit purchases, sales or offers to buy the securities being offered or displayed on the platform. 

Liquidity Risk

Be aware that you will be limited in your ability to resell your investment for the first year—and you may need to hold your investment for an indefinite period of time. While you are allowed to transfer shares to certain parties such as a family member or the firm that issued the securities, this may not be easy to do.

Read and Understand Key Disclosure and Education Information

Since crowdfunding investments are likely to be early-stage ventures and may be highly risky, the JOBS Act and Regulation Crowdfunding include provisions designed to inform investors about these investments and their potential risks. 

Companies that conduct offerings under Regulation Crowdfunding are required to disclose, among other things: 

  • A description of the business of the company and its anticipated plan of business, including its name, legal status, physical address and website address.
  • A discussion of the material factors that make an investment in the company speculative or risky.
  • A discussion of the company’s financial condition.
  • The names and positions of the directors and officers; the name of each person who is a beneficial owner of 20 percent or more of the company’s outstanding voting equity securities; and additional information such as the business experience of the directors and officers over the past three years.
  • The price of the securities or the method for determining the price.  

This information is to be filed in a document called Form C and uploaded to the SEC’s Edgar system for access by investors and crowdfunding intermediaries. 

Depending on the amount of money being raised—which includes any amounts raised by the company in the prior 12 months in reliance on JOBS Act crowdfunding—issuers are also required to make certain financial disclosures, including: 

Amount Raised Inflation-Adjusted Required Minimum Disclosures
$107,000 or less
  • Financial statements and specific line items from income tax returns, both of which are certified by the principal executive officer of the company.
$107,000.01 to $535,000
  • Financial statements reviewed by an independent public accountant and the accountant’s review report. If audited statements are available, those must be provided.
$535,000.01 to $1.07 million
  • For an issuer using crowdfunding for the first time, financial statements reviewed by an independent public accountant and the accountant’s review report. If audited statements are available, those must be provided.
  • For all other issuers, financial statements audited by an independent public accountant and the accountant’s audit report.

Be aware that an audit of financial statements involves a higher level of scrutiny than a review.

Changing Your Mind

You have up to 48 hours prior to the end
of the offer period to change your mind
and cancel your investment commitment
for any reason. Once the offering period
is within 48 hours of ending, you will not
be able to cancel for any reason even if
you make your commitment during this
period.


If the company makes a material change to
the offering terms or other information
disclosed to you, you will be given five
business days to reconfirm your investment.

Broker-dealers and funding portals that operate Regulation Crowdfunding platforms are required to:

  • Provide educational materials to help investors understand this type of investing, as well as make available information about the offering and the company raising the funds (such as Form C).   
  • Provide communications channels that allow discussions to take place about offerings on the platform.
  • Obtain a representation from the investor that he or she understands that they may lose their entire investment, and can bear such a loss. 
  • Provide prospective investors with questions designed to demonstrate an understanding, among other things, that it may be difficult to resell the securities and that investing in these types of securities involves risk. 

Four Tips  

While investing in early-stage businesses may bring rewards, it also carries risks. These tips can help you determine if a crowdfunding offering is right for you. 

1. Ask yourself if you can handle the risk—and the potential loss of your investment. Both are real possibilities when it comes to companies that issue securities using crowdfunding. The venture may not succeed. Startups and early-stage ventures can and do fail. You should be able to afford, and be prepared to lose, your entire investment. If you are risk-averse, are just starting to invest, have only a little money to invest, or may need the money in the short term, crowdfunding investments likely are not for you.

2. Read and understand the educational and financial information, and all disclosures, provided by the issuer and crowdfunding intermediaries. If you are working with a financial professional, or seeking information over a crowdfunding platform’s communication channel, ask direct questions about the investment, including worst-case scenarios. It’s also a good idea to seek a second, or even third, opinion especially when it comes to highly speculative investments. This might include checking with an accountant who understands financial balance sheets and likely has no vested interest in the investment.  

3. Recognize that fraud is a possibility.  As with all investment opportunities, the possibility of fraud is real. Protect yourself by understanding the tactics a fraudster might use—and how to avoid them. As noted above, check out investment professionals using BrokerCheck and go to FINRA’s Funding Portals Web page. Under Regulation Crowdfunding, offerings must be conducted through a registered broker or funding portal. A basic Internet search is also valuable. Proceed with caution if you turn up legal or regulatory concerns about company officials, or news reports that raise other red flags. 

4. Revisit your financial goals. Setting clear, prioritized goals—each with steps to achieve the goal, a price tag and a time frame—will help guide your investment approach, including whether crowdfunding offerings have a place in your portfolio. Basic strategies such as asset allocation and diversification can help manage risk and make sound investment decisions. 

Is Reg CF Right For You?

Appropriateness of Investing In Crowdfunding

Is investing in crowdfunding for everyone?
The possibility of investing in unique assets can sometimes overshadow the most important question when making an investment: “Is this investment right for me?” There are many factors that an investor should consider when determining the appropriateness of an investment in crowdfunding. We love to see investors getting involved with crowdfunding and contributing to companies on the platform, however, we also have each and every investor’s best interest at heart. This means stopping for a minute to discuss considering the appropriateness of investing using reg cf.
 
Do you understand the risks?
Although investing can be extremely lucrative, it can also go the other way! For this reason, it is important for each investor to understand the risks associated with an investment. Risks include, but are not limited to:
 
Illiquidity – Investments on the platform are generally illiquid. We do not offer a market for selling securities once an offering closes, and the regulations set forth by the SEC contain additional restrictions on the resale of your equity.
Speculative – The terms set by the issuer in crowdfunding are generally speculative. This just means that companies generally set their own terms, which include their own evaluation. For this reason, among many others, it is critical that each investor do their own research and utilize all educational resources provided to them.
Loss of Some or All of Your Investment – Investments on the platform are considered high risk. These are investments, and, unfortunately, not all investments succeed! If an investment is unsuccessful, you risk losing your entire investment.
Again, it is critical that each investor do their own research and utilize the educational tools provided to them through the platform and beyond. We provide this educational blog, an extensive FAQ page, additional educational pages, as well as communication gateways for the issuers to ask additional questions. Please use all of these resources to your advantage!
 
Can you afford to lose your entire investment?
When investing on the platform or elsewhere, it is critical to consider if you can afford to lose your entire investment. Since the risk of losing your entire investment exists, as does the inability to access the funds due to the illiquidity of your investment, you must ensure that you can survive without those funds.
 
Investments should not be undertaken with funds that you need. The funds used to invest should be extra money that you can afford to risk in return for the potential returns resulting from the issuer succes
Is investing in crowdfunding for everyone?
The possibility of investing in unique assets can sometimes overshadow the most important question when making an investment: “Is this investment right for me?” There are many factors that an investor should consider when determining the appropriateness of an investment in crowdfunding. We love to see investors getting involved with crowdfunding and contributing to companies on the platform, however, we also have each and every investor’s best interest at heart. This means stopping for a minute to discuss considering the appropriateness of investing using reg cf.
 
Do you understand the risks?
Although investing can be extremely lucrative, it can also go the other way! For this reason, it is important for each investor to understand the risks associated with an investment. Risks include, but are not limited to:
 
Illiquidity – Investments on the platform are generally illiquid. We do not offer a market for selling securities once an offering closes, and the regulations set forth by the SEC contain additional restrictions on the resale of your equity.
Speculative – The terms set by the issuer in crowdfunding are generally speculative. This just means that companies generally set their own terms, which include their own evaluation. For this reason, among many others, it is critical that each investor do their own research and utilize all educational resources provided to them.
Loss of Some or All of Your Investment – Investments on the platform are considered high risk. These are investments, and, unfortunately, not all investments succeed! If an investment is unsuccessful, you risk losing your entire investment.
Again, it is critical that each investor do their own research and utilize the educational tools provided to them through the platform and beyond. We provide this educational blog, an extensive FAQ page, additional educational pages, as well as communication gateways for the issuers to ask additional questions. Please use all of these resources to your advantage!
 
Can you afford to lose your entire investment?
When investing on the platform or elsewhere, it is critical to consider if you can afford to lose your entire investment. Since the risk of losing your entire investment exists, as does the inability to access the funds due to the illiquidity of your investment, you must ensure that you can survive without those funds.
 
Investments should not be undertaken with funds that you need. The funds used to invest should be extra money that you can afford to risk in return for the potential returns resulting from the issuer success.

Types of Securites

Types Of Securities
 
Why do I care about the different security types available to me? Now that you are finding your inner venture capitalist, its critical that you understand what you are investing in! Not all investments are the same. When making an investment on the platform it is essential to understand the type of security you are purchasing and its advantages or disadvantages.
 
Purchasing Equity Vs. Purchasing Debt
When learning about types of securities, it is best to understand the difference between purchasing equity and purchasing debt. Both of these securities are offered on the platform and it is critical to understand the difference.
Let’s start by exploring the basics of equity securities. When you purchase equity, you are becoming a partial owner of that investment. The number of shares you purchase, therefore, equates to a percentage of the company that you own! Therefore, as that company performs better and better, so does your investment. The potential upside of equity securities tends to be greater than that of debt securities since the potential growth of a company is technically unlimited. The inherent risk in investing in an equity security is that if the venture fails all together, the equity owners are often the last to be paid. You are, therefore, risking the loss of your entire investment on the belief that the company you invested in will perform well in the future.
Debt securities differ from equity securities in that companies are borrowing investor funds with the promise to repay the loan with a set rate of interest until the debt is repaid. Therefore, when purchasing a debt security, you are generally loaning your investment in exchange for a rate of interest set when the security is issued. The higher the risk of the debt security, the higher the rate of interest tends to be.
 
 
Equity Securities
We will now dive a bit deeper into equity securities to explain the various types of equity securities and what each entails. There are two types of equity securities: Common Stock and Preferred Stock. Each of these are explored in more detail below:
 
Common Stock
 
Common stock is the most common and simple type of equity securities. These investors are often given voting rights with their investment, however these voting rights are usually less influential than the voting rights provided to individuals holding preferred equity.
 
Preferred Stock
 
Preferred equity is typically issued to outside investors because it grants special rights and protection. This includes provisions such as anti-delusion rights. Additionally, increased influence on company decision-making is often included with these investments. Preferred equity holders are also able to claim their portion of a company’s assets prior to investors holding common stock.
 

LLC Units
 
LLC units represent ownership interests in a Limited Liability Company (LLC) and are a popular investment vehicle for entrepreneurs and investors alike. Similar to preferred stock, LLC units offer unique benefits and protections. Investors who hold LLC units often enjoy specific rights, such as a share in profits, voting power, and access to crucial company information. Moreover, LLC units provide a layer of limited liability protection, shielding investors’ personal assets from the company’s debts and liabilities. This versatile investment option allows individuals to participate in exciting ventures while contributing to the growth and success of the company they believe in.
 
The Bottom Line
 
Although there are many different types of securities, none are better than the rest. Each type of security could be best for a particular investor depending on the amount of risk they are willing to take on and additional rights/privileges they are looking to receive.
The main take away for all investors on the platform, is that crowdfunding involves many types of securities and it is important for you to read the subscription agreement for each issuer prior to investing. This will clearly spell out the offering including the securities you are purchasing and all special rights/privileges or voting power you will receive with your investment.

Understanding the Form-C

 

 
 
 

Form C – Everything You Need to Know

 
Form C is a critical step in the crowdfunding process for all companies raising under Regulation Crowdfunding. Form C is a disclosure document that is filed with the SEC prior to launching your campaign. Many founders are intimidated when they hear they must file with the SEC to raise; however, this process is really put into place to protect you and your investors. So, don’t be intimidated!
 

The Purpose of the Form C

Form C is a document that must be submitted to the SEC prior to launching your crowdfunding campaign under Regulation Crowdfunding. The document discloses the terms of your campaign and background into your company’s business. This form is required for many reasons, however three really stand out:
 

1. Provide Investors with Sufficient Information

One of the SEC and PicMii’s priorities is providing investors with sufficient information to make an educated decision to invest in an offering or not. This starts with Form C. Investors can find a wide range of information regarding a company and their offering on this form, which gives them everything they need to decide if they would like to participate in the campaign.
 

2. Protect Companies from Future Complaints

Form C protects companies from complaints alleging they did not provide enough information regarding their offering by standardizing what is required to be disclosed by companies raising under Regulation Crowdfunding. Without Form C, companies would be left guessing what information to provide to investors, which would lead to ambiguity in the space. Luckily, Form C solves this issue and provides companies with an outline of required information to be disclosed to all investors.
 

3. Document the Original Terms of Your Offering

One of the items disclosed within the Form C is the terms of your offering, which will also be outlined within your subscription agreement. This is especially important because it provides a basis from which any future updates must be disclosed. If any terms of the offering changes or a new executive officer announced, you must file an amendment to your Form C. This amendment is known as Form C/A and its purpose is to notify investors of any critical changes to the offering. In addition, you must file updates using Form C/U once your campaign reaches 50% and 100% of your funding goal.
 
 

What is Included In the Form C?

To put it simply, Form C includes a lot of questions. With the goal of providing as much information as possible to investors, it should be no surprise that the SEC requires a wide range of information be submitted. The following list includes the bulk of what is required in Form C:
 

1. General Offering Information

The first section of Form C focuses on general information regarding a companies offering. This section begins with the most simple information such as the name of your firm, how your company is incorporated, and your company address. It then requires some information regarding the intermediary you will be conducting your offering through (That’s Pocket Properties App!). We summarize this information below to make this section easy for you:CIK number of intermediary: TBA SEC file number of intermediary: TBA CRD number: TBA Lastly, this section includes specific information regarding your offering. This includes the type of security you are offering, target number of securities to be offered, price (or method for determining price), target offering amount, if over subscriptions will be accepted and, if so the maximum offering amount, and the deadline to hit the funding goal.
 

2. Financial Information

Form C also requires financial information from your company. This includes providing information on the following for the most recent fiscal year-end and the prior fiscal year-end: Total Assets, Cash and Cash Equivalents, Accounts Receivable, Short-term Debt, Long-term Debt, Revenues/Sales, Cost of Goods Sold, Taxes Paid, and Net Income.Companies must also provide financial statements for the two most recently completed fiscal years. These financial statements may be certified by the principal executive officer of your company if raising less than $107,000, however if raising more than $107,000 financial statements must be reviewed by a public accountant that is independent of the issuer and must include a signed review report.
 

3. Document the Original Terms of Your Offering

One of the items disclosed within the Form C is the terms of your offering, which will also be outlined within your subscription agreement. This is especially important because it provides a basis from which any future updates must be disclosed. If any terms of the offering changes or a new executive officer announced, you must file an amendment to your Form C. This amendment is known as Form C/A and its purpose is to notify investors of any critical changes to the offering. In addition, you must file updates using Form C/U once your campaign reaches 50% and 100% of your funding goal.

Reg CF SEC Guide

Regulation Crowdfunding header

Regulation Crowdfunding enables eligible companies to offer and sell securities through crowdfunding. The rules:

  • require all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal
  • permit a company to raise a maximum aggregate amount of $5 million through crowdfunding offerings in a 12-month period
  • limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period and
  • require disclosure of information in filings with the Commission and to investors and the intermediary facilitating the offering

Securities purchased in a crowdfunding transaction generally cannot be resold for one year. Regulation Crowdfunding offerings are subject to “bad actor” disqualification provisions.

Investor Limits

Investors Subject to Limits

The maximum amount you are permitted to invest if you are a non-accredited investor is determined by your net worth and yearly income.

If either your annual income or your net worth is less than $124,000, you may invest up to the greater of $2,500 or 5% of the higher of your annual income or net worth during any 12-month period.

You may invest up to 10% of your annual income or net worth, whichever is larger and does not exceed $124,000, in any 12-month period if both your net worth and annual income are equal to or more than $124,000.

Click here to determine how much you are allowed to invest.

Spouses are allowed to calculate their net worth and annual income jointly. This chart illustrates a few examples of the investment limits:

Investor Limits