Crowdfunding is Here! Part 2

WEEK 2 ISSUERS

Under the crowdfunded exemption, a company issuing securities is required to disclose certain information.  This disclosure, which is included in the offering documents, consists of information about the officers, directors, and anyone who owns 20% or more of the company.  Disclosures about the directors and the officers must cover the past three years.  The SEC adopted this shortened three year period because these small companies have a limited operating history.  The company also must include the price of the securities, the valuation method, and the target amount the company seeks to raise, along with a discussion of the company’s financial condition.  For larger offerings, the company should also include information from their tax returns that has been reviewed by an independent public accountant or an independent auditor.   In addition, the company must also disclose the purpose and intended use of the proceeds.  Much of this information will be captured on Form C and provided to the SEC.

In addition to these initial disclosure requirements, the SEC requires companies to amend their offering documents, constantly, to reflect any changes during the offering period.  This is an attempt to keep investors well informed and counter fraud.  The offering document and its contents are very similar to the type of information that is already required by the SEC for certain types of companies offering securities, known as “reporting companies.”  Only time will tell whether these regulations actually decrease or increase the burden on entrepreneurs seeking capital.  Added disclosure increases the cost of legal, accounting, and other compliance fees and drives up the cost of capital formation.  Disclosure of such information to the SEC inevitably creates additional liabilities too.  However, the SEC takes seriously its dual mission to protect investors while encouraging capital formation.

– Malika Simmons

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