“Crowdfunding” offers an option to startups and small businesses to raise capital, although it is a greatly misunderstood and misused term. It refers to the pooling of money from a crowd for the funding of a project or venture, whether utilizing a donation model, reward model, royalty model, debt model or equity model. Securities laws apply when equity or debt securities are offered.
In regard to crowdfunding, Congress amended the Securities Act to allow for an exemption from the registration of such securities if the issuer complies with certain rules and restrictions. To implement this amendment, federal crowdfunding rules were enacted by the SEC.
The federal rules, which apply when securities are sold in interstate transactions, provide that (i) the offering must be an “all-or-none” offering (meaning that the entire amount offered must be raised or else the raise “fails” and all subscriptions must be returned to investors), (ii) the aggregate amount sold by an issuer to all investors in any 12-month period may not exceed $1,000,000, (iii) offering activities must occur through a registered broker-dealer or a new type of platform that must also be registered with the SEC and known as a “funding portal”, and (iv) issuers may only communicate with investors through communication channels provided by the funding portal or a broker-dealer. Investors in the offering do not have to be accredited investors; however, the maximum amount any one investor can invest in crowdfunding offerings in any 12-month period cannot exceed the following:
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