A Tale of Two Exemptions

There is a fair amount of confusion about equity-based crowdfunding, how it will work once it is legal, how the crowdfunding exemption will interact with other securities law exemptions, and in general what the future holds. This is natural and to be expected in light of the dramatic nature of the two new laws Congress passed.

In case you had forgotten, Congress did two things in the JOBS Act which dramatically altered the securities law legal landscape.

First, it passed a statute stating that the SEC shall issue rules which will allow general solicitation and general advertising in all accredited investor offerings. This is dramatic; at odds with decades of law. Soon, issuers will be able to run ads in newspapers advertising their private securities offerings. This is a totally new, totally radical approach to securities offerings.

Second, it passed an equity crowdfunding exemption. Again, this is totally new. There is no precedent for it. The SEC has yet to issue rules. And so we have no idea what the exact parameters of this exemption will look like until the rules are issued.

Keep in mind that neither of these two helpful changes to the law is yet legal. We are still waiting on SEC regulations.

Below is a table comparing the current most commonly used federal exemption from the registration requirements for early stage equity financing of emerging businesses and the new equity crowdfunding exemption, which I hope you will find helpful.

Rule 506 Crowdfunding
Limitation on Offering Size None $1M during any 12 month period (including amounts raised in any other private securities offering in the same period).
Limitation on number of investors Not if all investors are accredited. Not technically, but there is a some outside limit by virtue of the the offering size limit.
Advertising allowed Yes – once the rules are final. No, companies cannot advertise; they can only refer people to portals.
Specific Disclosure Requirements None required by the rules; but subject to anti-fraud requirements. Yes, very specific, detailed disclosure requirements, the complete details of which have yet to be finally determined. Also subject to anti-fraud requirements.
Third party intermediary required No Yes; companies have to go through a broker-dealer or registered funding portal.
Ongoing SEC reporting No Yes, but exactly what is required here is not yet defined.


About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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