On July 10 of this year, the SEC passed a portion of the JOBS Act of 2012 that lifts the longtime ban on public solicitation and creates a new type of offering under Rule 506(c). In essence, these new rules formalize the process for "crowdfunding" for those companies looking to raise capital.
Rule 506(c) offerings will technically be private placements made only to “accredited” investors, but for the first time, companies will be allowed to freely advertise that they are fundraising to the general public. This advertising can take place on television, in newspapers, or online.
Below are some of the key terms of the new law related to the “accredited” investor requirement:
- The issuer must take reasonable steps to verify that investors are “accredited.”
- Accredited investors are defined as:
- An individual whose net worth or joint net worth with a spouse exceeds $1 million at the time of the purchase, excluding the value and any related indebtedness of a primary residence OR
- An individual whose annual income exceeded $200,000 in each of the two most recent years (or whose joint annual income with a spouse exceeded $300,000 for those years) with a reasonable expectation of the same income level in the current year.
Even though the 506(c) amendment has been passed by the SEC, the rules won’t take effect until they are published in the Federal Register.
If you would like to learn more about this new funding mechanism, you can review the SEC fact sheet here.
In addition, Forbes magazine posted its list of the top 10 sites for crowdfunding in May. You can check it out here.
What are your thoughts on this new option for raising capital? Share in the comments.