How Accredited Crowdfunding Under Rule 506(c) Can Work For You After COVID-19

In the past two months, the COVID-19 pandemic has caused quarantines and closures and has restricted the movement of people and goods between countries and within the United States. It’s devastated certain industries and economies at home and abroad. Uncertainty about the duration of the crisis has roiled the financial markets, leading to worries about a global recession to come. Large businesses like Boeing will survive, as in 2008, because they’re “too big to fail,” but the small businesses may face hardship. Some—the lucky ones—will need to raise capital to respond to increased demand for their crisis-related products; others will need additional cash to keep their businesses viable during the pandemic.

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1. How Accredited Crowdfunding Under Rule 506(c) Can Work For You After COVID-19
2. Crowdfunding a Securities Offering During the COVID-19 Pandemic In the past two months, the COVID-19 pandemic has caused quarantines and closures and has restricted the movement of people and goods between countries and within the United States. It’s devastated certain industries and economies at home and abroad. Uncertainty about the duration of the crisis has roiled the financial markets, leading to worries about a global recession to come. Large businesses like Boeing will survive, as in 2008, because they’re “too big to fail,” but the small businesses may face hardship. Some—the lucky ones—will need to raise capital to respond to increased demand for their crisis-related products; others will need additional cash to keep their businesses viable during the pandemic. While government relief is in the works, many businesses won’t qualify, or the resources available to them will not be enough to address their needs. But some industries will not be impacted and may even experience growth during the COVID-19. outbreak Companies should consider crowdfunding a securities offering as an option.
3. The Accredited Crowdfunding Exemption from SEC Registration There are several securities exemptions available for crowdfunding offerings, each with unique benefits and requirements. In this presentation, we discuss accredited crowdfunding pursuant to Rule 506(c) of Regulation D of the Securities Act of 1933, as amended (the “Company”) which allows a company to raise unlimited funds from accredited investors without a filing with the Securities & Exchange Commission (“SEC”) if certain requirements are met. Under Rule 506(c), the company must take “reasonable steps” to verify the investors' accredited status. In these times of social distancing, Rule 506(c) provides an important benefit because companies can offer and sell their securities online using social media outlets like Twitter, Facebook and Instagram, enabling it to appeal to the “crowd” that characterizes a crowdfunding effort.
4. The Rule 506(c) Crowdfunding Exemption from SEC Registration Rule 506(c) has the following technical requirements: ➢ A company conducting an accredited crowdfunding offering must file a notice with the SEC on Form D within 15 days after the first sale of securities in the offering. ➢ Accredited Crowding will not be available to an issuer if certain “covered persons” are subject to Bad Actor disqualification. ➢ Investors in accredited crowdfunding offerings will receive restricted securities. ➢ Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(c), states still have authority to require notice filings and collect state filing fees. ➢ Rule 506(c) requires the company to take reasonable steps to verify accredited investor status.
5. Continued: Accredited Investor Verification Procedures in Accredited Crowdfunding Offerings ➢ The issuer may review any IRS form that reports the purchaser’s income for the two most recent years and obtain a written representation from the purchaser that he or she has a reasonable expectation of reaching the income level necessary the current year. ➢ The issuer may review certain types of documentation dated within the prior three months and obtain a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed. ❖ With respect to assets: Bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports issued by independent third parties; and ❖ With respect to liabilities: A consumer report from at least one of the nationwide consumer reporting agencies.
6. Accredited Investor Verification Procedures in Accredited Crowdfunding Offerings ➢ The investor may obtain a written confirmation from a registered broker-dealer or investment adviser, attorney, or accountant stating that he took reasonable steps to verify that the investor is an accredited investor within the prior three months and determined that the investor is an accredited investor. ➢ The Company may engage an accredited investor verification provider for a modest fee to verify the investors' status. The use of accredited investor verification providers has become common in offerings made under Rule 506(c). Their procedures seem to be sufficient to meet the requirements of Rule 506(c), although the SEC has not taken a formal position on this issue.
7. Disclosure Obligations in Accredited Crowdfunding Offerings Rule 506(c) does not require the company to provide specific line item or other information to investors as a condition of the exemption; however, it is advisable to provide all material information to potential investors. ➢ Offering materials should not contain misstatements of material information or omissions of material facts, in order to make the disclosures not misleading. ➢ Management should review all offering materials to ensure the information is true and complete and that all material information is disclosed. ➢ Management should provide biographical and background information in writing. ➢ Offering materials should be drafted with the assistance and participation of experienced securities counsel and the company’s accountants. ➢ Offering materials should be amended if they become inaccurate, misleading or incomplete. ➢ Management should not make representations to investors unless they are in the written offering materials.
8. Filing the Form D Notice of Sales Under Regulation D Issuers conducting Accredited Crowdfunding offerings must file a Form D Notice of Exempt Offering of Securities with the SEC within 15 days of the first sale of securities in the offering. For the purposes of Form D, the date of first sale is the date on which the first investor is irrevocably contractually committed to invest in the offering. Additionally, the issuer must periodically amend the Form D for material changes in the information provided. Form D requires information about the issuer and the offering: ➢ the issuer’s full name, ➢ state of domicile, ➢ year of incorporation if formed less than 5 years prior to the filing, ➢ the identity of the issuer’s officers and directors, ➢ the type of security being sold, ➢ the number of non-accredited investors who have invested in the offering and the total number of investors in the offering, ➢ the minimum investment amount, ➢ The amount of securities sold in the offering and the amount remaining to be sold, ➢ promoters involved in the offering, ➢ identity of salespersons and the states in which the offering will be solicited, and ➢ the amount of sales commissions, finders' fees and use of proceeds for payments to executive officers, directors or promoters.
9. Disclosure Obligations in Accredited Crowdfunding Offerings Rule 506(c) does not require the company to provide specific line item or other information to investors in order to claim the exemption; however, it is advisable to provide all material information to potential investors. ➢ Offering materials should not contain misstatements of material information or omissions of material facts, in order to make the disclosures not misleading. ➢ Management should review all offering materials to ensure the information is true and complete and that all material information is disclosed. ➢ Management should provide biographical and background information in writing. ➢ Offering materials should be drafted with the assistance and participation of experienced securities counsel and the company’s accountants. ➢ Offering materials should be amended if they become inaccurate, misleading or incomplete. ➢ Management should not make representations to investors unless they are in the written offering materials.
10. For further information about this information, please contact us at 561- 416-8956 or by email at info@securitieslawyer101.com. This information is provided as a general informational service to clients and friends of Hamilton & Associates Law Group, P.A. and Williams Securities Law and should not be construed as such, does not constitute legal 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. Hamilton & Associates Law Group, P.A. Williams Securities Law 101 Plaza Real South, Suite 202 North Boca Raton, Florida 33432 Telephone: (561) 416-8956 Facsimile: (561) 416-2855 www.SecuritiesLawyer101.com www.gopublicdirect.com
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