Neighbor Capital was created in anticipation of Regulation Crowdfunding being signed into law. We were so excited to see this legislation pass because it presented new opportunities for businesses and investors alike. Businesses have difficulty raising capital from traditional investors now have the opportunity to raise money from anyone, including the customers who love them. In the past this was illegal, so investment in early-stage ventures was mostly limited to wealthy investors. Regulation Crowdfunding enables anyone, regardless of their wealth, to invest in companies from the ground up.
This is huge because early investors make the most profit. At the same time, they take the most risk as most start-ups and early-stage ventures fail. Regulation Crowdfunding is meant to make investments in such companies more transparent and more protective of Main Street investors. Some protective measures include:
A cap on investment
Investors are limited on what they can invest in all crowdfunding offerings in a twelve-month period. This calculation is based on an investor’s income and net worth as follows:
- If your annual income or net worth is less than $107,000, you may invest the greater of $2,200 or 5% of your annual income or net worth, whichever is less.
- If both your annual income and net worth is equal to or more than $107,000, then you may invest 10% of your annual income or net worth, whichever is less, up to $107,000.
For investors with less than $107,000 in income, the most they can invest is $2,200, meaning that $2,200 is the most they can lose in Regulation Crowdfunding offerings in a twelve-month period.
Centralized, transparent information
All Regulation Crowdfunding offerings must be posted in one place. These are either broker-dealers or funding portals, which are regulated by the SEC and FINRA. An issuer cannot post an offering on multiple funding portals or discuss their offering in any other forum, whether in person, on the phone, through social media, or on any other medium. If an issuer wants to promote their offering, he or she must do so on the funding portal.
Communications on the funding portal are also transparent. An issuer or the agent of the issuer must disclose their relationship with the issuer and even specify any compensation they receive for making such a communication. Additionally, the crowd cannot be silenced on a funding portal as the SEC deemed it important for potential investors to discuss an offering in full and to learn about potential risks of an offering through discussion.
Funding portals must review all issuers and offerings before posting an offering on its platform. The funding portal cannot post an offering unless it has a reasonable basis to believe that the offerings comply with the rules of Regulation Crowdfunding. If a company or any of its top people are subject to a disqualification due to activities such as securities violations or certain crimes, the Company cannot raise money under Regulation Crowdfunding and a funding portal cannot post their offering. In addition, a funding portal cannot post fraudulent or potentially fraudulent offerings. If a funding portal has any reason to believe that an offering has a potential for fraud or raises other investor protection concerns, the funding portal must cancel the offering and refund investors’ money.
Funding portals must educate potential investors and ensure that the educational materials that they provide are up-to-date. Topics that a funding portal must cover include the following:
- the process for investing on the platform
- the types of securities being offered and the risks associated with each type of security
- the information an issuer must provide to investors
- resale restrictions
- investment limits
- information on the restrictions for canceling an investment commitment
- that the investor must consider the appropriateness of an investment in crowdfunding
- that the intermediary may not have an ongoing relation with the issuer after completion of the offering, and
- that under certain situations the issuer may cease publishing annual financial reports