posted on 16 February 2016
from the Securities and Exchange Commission
The SEC's Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about a new investing opportunity in the form of securities-based crowdfunding.
Crowdfunding generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people. Over the last few years, crowdfunding websites in the United States have proven a popular way by which to solicit charitable donations and to raise funds for artistic endeavors like films and music recordings.
Under recently adopted rules, the general public will have the opportunity to participate in the early capital raising activities of start-up and early-stage companies and businesses. Starting May 16, 2016, companies can use crowdfunding to offer and sell securities to the investing public.
Can I make a crowdfunding investment?
Anyone can invest in a crowdfunding securities offering. Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income.
If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000.
The following table provides a few examples:
How do I calculate my net worth?
Calculating net worth involves adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.
For purposes of crowdfunding, the value of your primary residence is not included in your net worth calculation. In addition, any mortgage or other loan on your home does not count as a liability up to the fair market value of your home. If the loan is for more than the fair market value of your home (i.e., if your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.
Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount doesn't exceed the value of the residence) will count as a liability as well. The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.
While your individual circumstances will vary, the following table sets forth examples of calculations under the net worth test in order to determine crowdfunding investment limits:
How do I make a crowdfunding investment?
You can only invest in a crowdfunding offering through the online platform, such as a website or a mobile app, of a broker-dealer or a funding portal. Companies may not offer crowdfunding investments to you directly - they must use a broker-dealer or funding portal.
The broker-dealer or funding portal - a crowdfunding intermediary - must be registered with the SEC and be a member of the Financial Industry Regulatory Authority (FINRA). You can obtain information about a broker by visiting FINRA's BrokerCheck or calling FINRA's toll-free BrokerCheck hotline at (800) 289- 9999. You can obtain information about a funding portal by visiting the SEC's EDGAR website.
Keep in mind that you will have to open an account with the crowdfunding intermediary - the broker-dealer or funding portal - in order to make an investment and all written communications relating to your crowdfunding investment will be electronic.
What should I keep in mind?
Crowdfunding offers investors an opportunity to participate in an early-stage venture. However, you should be aware that early-stage investments may involve very high risks and you should research thoroughly any offering before making an investment decision. You should read and fully understand the information about the company and the risks that are disclosed to you before making any investment.
The following are some risks to consider before making a crowdfunding investment:
How do I get informed?
Broker-dealers and funding portals that operate crowdfunding platforms are required to offer educational materials to help investors understand this type of investing. These materials further detail the risks involved when making a crowdfunding investment. You should take advantage of this resource to educate yourself and understand the risks of making crowdfunding investments. Remember, this is your money that you are putting at risk, and you should only invest after careful consideration of the risks.
As mentioned, the companies that you invest in are required to disclose a limited amount of information to you. This information includes general information about the company, its officers and directors, a description of the business, the planned use for the money raised from the offering, often called the use of proceeds, the target offering amount, the deadline for the offering, related-party transactions, risks specific to the company or its business, and financial information about the company. You should use this information to determine whether a particular investment is appropriate for you.
The sharing of views by members of the crowd is considered by some to be an integral part of crowdfunding. Broker-dealers and funding portals, through their crowdfunding platforms, are required to have communication channels transparent to the public - for example, on an online forum - relating to each particular investment opportunity. In these channels, the crowd of investors can weigh in on the pros and cons of an opportunity and be able to ask the company questions. All persons representing the company must identify themselves. It may be worthwhile to monitor these communication channels before and after you make your commitment to invest.
What's different about being a crowdfunding investor?
Being a crowdfunding investor is different than being a shareholder in a publicly listed company. For one thing, you cannot sell your shares at any time as you would be able to do if you held shares in a publicly listed company. In fact,you are restricted from reselling your shares for the first year, unless the shares are transferred:
Another difference from being a shareholder of a publicly listed company is the amount of information you'll receive about your investment. Publicly listed companies generally are required to disclose information about their performances at least on a quarterly and annual basis and on a regular basis about material events that affect the company. In contrast, crowdfunding companies are only required to disclose annually their results of operations and financial statements.
To learn more about crowdfunding, see the recently adopted rules.
For information on how to search for company documents in the SEC's EDGAR database, see Using EDGAR - Researching Public Companies.
For another resource for using EDGAR, see Researching Public Companies Through EDGAR: A Guide for Investors.
For more information about accredited investors, see our Investor Bulletin.
For additional investor educational information, see the SEC's website for individual investors, Investor.gov.
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