New SEC rules govern companies issuing stock through crowdfunding

Minnesota entrepreneurs and investors may be interested to know that the U.S. Securities and Exchange Commission has adopted final regulations, effective in the summer of 2016, governing the issuance of stock through crowdfunding. Crowdfunding has become a popular way to raise capital over the internet. It has not been generally used to offer and sell stock, however, because doing so would require compliance with federal securities laws.

The U.S. JOBS Act granted an exemption permitting crowdfunding for the offer and sale of securities and gave the SEC the task of adopting regulations applicable to crowdfunding. The Act also allowed for the creation of new entities called funding portals and authorized them to offer and sell securities without the necessity of registering as brokers.

These rules will provide a new way for small businesses to raise capital. Under the new rules a company can raise a total of $1 million a year through crowdfunding.

The rules protect individual investors by setting annual limits, based upon net worth and annual income, on the amount they can invest through crowdfunding. The new rules also require crowdfunding companies to make detailed disclosures to potential investors. Required disclosures include the price of the stock, financial statements and information about officers, directors and owners of the business.

There are a number of methods available for financing a startup or business expansion. In choosing a method, businesses must be careful to comply with federal and Minnesota laws. Seeking the advice of an experienced business attorney can be very helpful in this area.

Source: U.S. Securities and Exchange Commission, “SEC adopts rules to permit crowdfunding,” Accessed Dec. 21, 2015

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