What to Know Before You Take the Plunge
The investment crowdfunding marketplace is growing faster than ever before, and is projected to grow by $196.36 billion from 2021 to 2025.
Unfortunately, industry watchers have observed an alarming level of non-compliance with the most basic rules of Regulation Crowdfunding by both companies raising capital and the platforms hosting the campaigns.
Non-compliance can result in regulatory enforcement action and/or investor lawsuits. So if you’re considering dipping a toe into the crowdfunding world, compliance should be at the top of your list.
In 2016, the SEC completed its rulemaking process for Regulation Crowdfunding. It suddenly became possible for a business to list an investment offering on a platform, and anyone in the United States could invest in the offering. But before doing that, the business, as well as the platform, must comply with some basic rules of the road.
According to a recent analysis, only a small minority of offerings listed on Regulation Crowdfunding platforms are compliant!
Crowdfunding compliance—what to watch for
To offer securities under Regulation Crowdfunding, you must complete a federal Form C (also known as the offering statement). The form takes about 60+ hours to properly complete and is designed to provide all the information investors need before deciding whether to invest. Without this documentation, investors would essentially be going in blind.
A properly prepared Form C protects the business that is raising funds from future lawsuits from investors who claim they did not receive the information that was supposed to be disclosed.
In addition to the Form C, there are requirements for additional reports after you complete your raise.
Failure to comply with these requirements can result in private litigation—all of the investors in a non-compliant offering are entitled, at a minimum, to rescission. In a rescission, the company must return the proceeds of the investment to the investor and pay interest. The company may also be subject to enforcement actions by federal and state regulators.
If you fail to comply with all of the regulations, you create a potential liability for your company which would have to be disclosed to all future potential investors.
The effort of making sure you are compliant on the front end is well worth avoiding the potential nightmare scenarios if you don’t!
What to expect from a regulation crowdfunding platform
With compliance top of mind, it’s essential to seriously examine the level of compliance and transparency your platform of choice is practicing.
At a minimum, here are a few helpful questions any investor or entrepreneur should ask before choosing a crowdfunding platform:
- What efforts are they taking to meet the regulatory requirements?
- Do they prepare the Form C for the companies that list on their platform? If so, what is the training of the person that prepares it (is that person a lawyer)?
- If the platform prepares your Form C and it is found to be deficient, does the platform cover the resulting litigation and other expenses?
Compliance isn’t optional—it’s a must
As investment crowdfunding continues to grow, so do the concerns surrounding regulation and compliance and the likelihood that private lawsuits and public enforcement actions will become commonplace.
If you’re interested in connecting with one of our team members to discuss how we can support you with planning and implementing a compliant fundraising campaign, complete our Interest Form.