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US Securities and Exchange Commission

SEC Relief Allows Small Businesses to Raise Capital More Quickly Under Regulation Crowdfunding

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Soyoung Ho

With small businesses struggling because of the economic turmoil brought about by the COVID-19 pandemic, the SEC is providing temporary relief to expedite the crowdfunding offering process. Among other things, companies do not have to get an independent accountant’s review of the financial statements for certain amounts of offerings.

In an effort to slow the transmission of the novel coronavirus, many states have issued stay-at-home orders, although some have started to ease the restrictions. And small companies have been particularly hit hard as they had to shut down their business operations.

“In the current environment, many established small businesses are facing challenges accessing urgently needed capital in a timely and cost-effective manner,” SEC Chairman Jay Clayton said in a statement. “Today’s action responds to feedback we have received from our Small Business Capital Formation Advisory Committee and others about the difficulties these companies may face in conducting an offering within a time frame that meets pressing capital needs, while continuing to provide appropriate protections for investors.”

(See SEC Looking for Ways to Help Small Businesses in the April 9, 2020, edition of Accounting & Compliance Alert and Small Business Advisory Panel to Discuss SEC’s Proposed Reforms to Exempt Offerings in the May 4, 2020, edition of ACA.)

To take advantage of the relief, a company must meet enhanced eligibility requirements and disclose to investors that it is relying on the SEC’s relief. The exact process and conditions to use the relief are spelled out in Release No. 33-10781Temporary Amendments to Regulation Crowdfunding, published on May 4, 2020.

The amendments in the release are effective from May 4 to March 1, 2021. The relief applies to securities offerings initiated under Regulation Crowdfunding between May 4 and August 31.

Reg CF allows private companies to raise as much as $1.07 million from the public each year through registered online portals or broker-dealers. An individual with an income or net worth below $107,000 can invest $2,200 per year in crowdfunding deals, or 5 percent of the lesser of their net worth or income. Someone above that wealth threshold can invest 10 percent of the lesser of their income or net worth. No investor can put more than $107,000 per year into crowdfunded offerings.

Companies raising money through crowdfunding are subject to scaled accounting and disclosure requirements based on the size of the offering:

  • for offerings of $107,000 or less, companies must provide financial statements and certain information from the company’s income tax returns
  • for offerings of more than $107,000 but not more than $535,000, companies must provide financial statements that are reviewed by an independent public accountant
  • for offerings of more than $535,000, companies that raise funds through Reg CF for the first time must provide financial statements reviewed by a public accountant. For those that have previously sold securities using Reg CF, the financial statements must be audited by a public accountant. For those that have previously sold securities using Reg CF, the financial statements must be audited by a public accountant.

In particular, Release No. 33-10781 gives flexibility to companies in determining interest in their offering before preparing their full offering materials. Then they can close the offering and get access to funds sooner than Reg CF allows.

The release has a table that explains who is eligible for the relief, the existing Reg CF, and the temporary amendments.

The exemption from financial statement reviews by a public accountant is for companies that raise more than $107,000 but not more than $250,000 within a 12-month period. Instead, the release said that companies should provide financial statements and certain information from their federal income tax returns, both certified by the principal executive officer.

Sales of securities are permitted after the information in an offering statement is publicly available for at least 21 days under Reg CF.

The SEC’s relief allows a company to sell securities as soon as they have received binding investment commitments covering the target offering amount. Release No. 33-10781 notes that commitments are not binding until 48 hours after they are given.

Foreign companies, investment companies, and blank check companies among others, cannot take advantage of the temporary relief.

Moreover, companies must have been operating for more than six months and have sold securities using Reg CF at the time the relief went into effect.

The top Republican on the House Financial Services Committee, Patrick McHenry said in a statement that he is happy to see the SEC take action to help small businesses impacted by the novel coronavirus.

“But I would encourage them to think bigger,” he said. “Considering the enhanced need for capital formation due to the voluntary shutdown of our economy, we should provide as much relief as possible.”


This article originally appeared in the May 06, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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