Expedited Regulation Crowdfunding Offering Rules For Coronavirus Impacted Issuers

SEC Provides Rules Allowing Expedited Regulation Crowdfunding Offerings

On May 4, 2020, the Securities and Exchange Commission (the “SEC”)  temporary conditional relief for certain  companies affected by COVID-19 that may seek to meet their funding needs using Regulation Crowdfunding aka Regulation CF. The rules are designed to expedite the crowdfunding offering process for eligible companies by providing them with relief from certain rules with respect to the timing of Regulation Crowdfunding offerings and the financial statements requirements.

To use the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between the effective date of the temporary rules and August 31, 2020.

Eligibility to Use the Regulation Crowdfunding Exemption and the SEC’s Temporary Rules

Existing Regulation Crowdfunding is presently 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 SEC’s 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 Using Regulation Crowdfunding

Offers of the Regulation Crowdfunding securities may be made after filing of the offering statement with the SEC, but financial statements may be initially omitted (if not otherwise available). Under the existing rule this is not permissible. Under both the existing and temporary SEC rule, the issuer may only accept investment commitments after filing of offering statement that includes financial statements or amended offering statement that includes financial statements with the SEC.

Financial Statement Requirements

Under existing Crowdfunding, the issuer must provide financial statements required if it is offering more than $107,000 and not more than $250,000 in a  12-month period which must be reviewed by an independent public accountant. Under the temporary rules, the issuer must provide financial statements and certain information from the issuer’s Federal income tax returns, both certified by the principal executive officer.

Sales of Securities in the Crowdfunding Offering

Under existing Regulation Crowdfunding, sales may be made after the information in an offering statement is publicly available for at least 21 days. Under the temporary rules, sales may be made as soon as an issuer has received binding investment commitments covering the target offering amount. Note that  commitments are not binding until 48 hours after they are given.

Closing the Regulation Crowdfunding Offering

Early closing is permitted under existing Regulation Crowdfunding once the 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.

Under the temporary SEC rule, closing can as soon as binding commitments for the target amount are received 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.

The SEC’s temporary rules are intended to expedite the crowdfunding offering process for smaller, previously established companies directly or indirectly affected by COVID-19 that are seeking to meet their funding needs through the offer and sale of securities pursuant to Regulation Crowdfunding.

The temporary rules  allow issuers that meet certain eligibility criteria to test the waters prior to preparation of full offering materials and to have access to offering funds sooner than would be possible in the absence of the temporary relief. Additionally, the temporary rules also provide an exemption from certain financial statement review requirements for issuers offering more than $107,000 but not more than $250,000 in theirs securities offering within a 12-month period.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes. For more information about going public with Form S-1, Form F-1 and Regulation A Securities Offerings, Rule 506 and Regulation CF crowdfunding,  sponsoring market makers and Form 211,  dual listings and foreign issuer listings and public company SEC reporting requirements, please contact Hamilton & Associates Law Group.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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