Earlier this month the SEC announced that it would provide temporary, conditional relief for established smaller companies who have been affected by COVID-19 and are looking to meet urgent funding needs through a Regulation Crowdfunding offering. The temporary amendments to existing Regulation Crowdfunding will expedite the offering process for eligible companies by suspending certain rules regarding the timing of a company’s offering and the financial statements required to be included in issuers’ offering materials. These amendments will apply to offerings launched between the effective date of the temporary rules and Aug. 31, 2020.1
SEC Chairman, Jay Clayton, explained the motivation behind the recent changes stating, “In the current environment, many established small businesses are facing challenges accessing urgently needed capital in a timely and cost-effective manner… Today’s action responds to feedback we have received from our Small Business Capital Formation Advisory Committee and others about the difficulties these companies may face in conducting an offering within a time frame that meets pressing capital needs, while continuing to provide appropriate protections for investors.”2
These temporary rules will provide greater flexibility which will allow for issuers to assess interest in a Regulation Crowdfunding offering prior to preparation of full offering materials, and then once launched, to close such an offering and have access to funds sooner. To benefit from these temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief.3
In response to the widespread effects of Covid-19, the SEC has put into place several operational initiatives, market-focused actions, targeted assistance, and investor protection efforts to continue to ensure it is able to fulfill its mission in this time of economic turbulence.4
In addition to the temporary amendments mentioned above, on March 4th the SEC released a proposal which would allow for startups to increase how much money they can raise from crowdfunding from $1.07 million to $5 million over a 12-month period, as well as raise the amount an individual investor could contribute (now up to 10 percent of their annual income or net worth).
Crowdfunding investments can only be made through an online platform operated by a SEC-registered intermediary, either a registered broker-dealer or funding portal.5 This type of investment option could be a good fit for startups who have a strong product offering, a wide network of potential investors, and are looking to retain primary control over how the company is run. The hope is that with these proposed changes to Regulation Crowdfunding more small businesses will have access to the funds they need to sustain operations through these times of economic uncertainty.
To learn more about the SEC’s recent amendments to Regulation Crowdfunding visit https://www.sec.gov/news/press-release/2020-101.
To learn more about the SEC’s other initiatives in response to Covid-19 visit https://www.sec.gov/sec-coronavirus-covid-19-response.
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Watchdog Capital, LLC
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