Right about now, many business owners are asking themselves – what’s next?  How can I sustain my business?  Where can I obtain additional financing?  What if I need quick access to capital?  Am I out of options?

Maybe your business received federal, state, or local government financial assistance in response to the crisis.  Maybe you are in the category of business owners who either did not qualify for any government funding, were unable to apply in time, or chose, for various reasons, not to apply for government assistance.

In any of these scenarios, the need for continued access to capital is likely an issue because these programs, by design, were all intended to provide temporary relief – they are not a long-term solution for the very real long-term financial consequences of the current crisis.

There certainly is no one-size-fits-all approach to financing your business.  But as more traditional streams of cash flow like obtaining lines of credit, term loans, and revolving loans from commercial banks become harder to come by, and access and appeal to private investors becomes even more challenging, now is the time to be creative and to explore and examine new opportunities for sustainability.  Whether your company has successfully conducted private offerings in the past or you are only just beginning to explore ways to grow your investor-base, the process can often be daunting, intimidating, and expensive.  This is why the Securities and Exchange Commission (SEC) is working to streamline the exempt offering process and to create new avenues to provide small businesses a financial path forward.  Specifically, the SEC’s Small Business Capital Formation Advisory Committee has been working to provide guidance and recommendations on existing SEC rules, regulations and policies impacting small businesses in response to the new challenges of the COVID-19 crisis.  This series will highlight the latest SEC developments and provide examples of how you can use these changes to your advantage.

Regulation Crowdfunding[i] – A Potential Alternative to Traditional Private Offerings

Regulation Crowdfunding is a way to raise capital by connecting your business with the public.  It harnesses the power of social media to allow small businesses to attract investors from a large pool of individuals willing to invest relatively small amounts of money.

The Upside:

  • Accessible to nearly every type of business.
  • Both accredited and unaccredited investors[ii] are eligible to invest, allowing your family and friends or just members of your community and people who believe in your business to have a stake in your success.
  • Offerings must be conducted through a registered broker-dealer or funding portal, allowing instant access to a vast network of potential investors and sometimes other supportive services.
  • No restrictions as to the type of securities offered (i.e., allowing either debt or equity securities to be issued).

The Downside:

  • Aggregate investment amount is capped at $1,070,000 in a 12-month period.
  • Financial disclosures to the public are required.
  • Fees vary by platform.
  • Annual reporting is required.

Why Consider Regulation Crowdfunding Now? 

Temporary amendments to the regulation crowdfunding rules are in place until August 2020.[iii] Specifically:

  • Audited financial statements are no longer required at the outset of an offering.
  • For offerings of more than $107,000 but less than $250,000 in a 12-month period, financial statements and certain information from the issuer’s Federal income tax returns may be certified by the principal executive officer in lieu of audited financial statements.
  • No minimum 21-day advanced posting requirement for the issuer’s business information to be made publicly available before securities are sold.
  • Issuers are provided greater certainty about their offering’s success and quicker access to funds by:
    • Limiting an investor’s ability to cancel an investment commitment to only 48 hours and after 48 hours only if there is a material change to the terms of the offering or to the information provided by the issuer; and
    • Allowing the issuer to close the offering prior to the deadline once the target amount is met or exceeded.
  • Note, an issuer’s reliance on the amended rules must be disclosed in the offering materials.

*To take advantage of the temporary amendments outlined above, the offering must commence by August 31, 2020.

The Business Planning and Transactions attorneys at Rosenberg Martin Greenberg, LLP are closely monitoring the Regulation Crowdfunding Amendments. For more information or to discuss whether Regulation Crowdfunding may be an option for you and your business please contact Gabby Shirley at 410-727-6600 or email gshirley@rosenbergmartin.com.


[i] Regulation crowdfunding is an exemption under the Securities Act of 1933 instituted under the Jumpstart Our Business Startups (JOBS) Act of 2012 (adding Section 4(a)(6) to the Securities Act); 15 U.S.C.A. §77d(a)(6); https://www.sec.gov/rules/final/2015/33-9974.pdf

[ii] 17 C.F.R. §230.501(a) provides the definition of “accredited investor.”  There are numerous categories but with respect to natural persons, this term means “any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000” or “any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.” 17 C.F.R §230.501(a)(5) and (6), respectively.

[iii] See https://www.federalregister.gov/documents/2020/05/07/2020-09806/temporary-amendments-to-regulation-crowdfunding; see also https://www.sec.gov/rules/interim/2020/33-10781.pdf.