The Securities and Exchange Commission (the “SEC”) recently adopted temporary final rules to Regulation Crowdfunding to address companies’ urgent COVID-19 capital needs.  The temporary rules provide tailored, conditional relief to established smaller companies from certain Regulation Crowdfunding requirements relating to the timing of the offering and the availability of financial statements required to be included in issuers’ offering materials.  For example, the temporary rules provide an exemption from certain financial statement review requirements for issuers offering $250,000 or less in securities in reliance on Regulation Crowdfunding within a 12-month period.

The SEC included the following table summarizing the existing Regulation Crowdfunding and changes resulting from the temporary rules:

  Regulation Crowdfunding Temporary Rule Amendments
Eligibility The offering exemption is not available to:

·       Non-U.S. issuers;

·       Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

·       Investment companies;

·       Blank check companies;

·       Issuers that are disqualified under Regulation Crowdfunding’s

disqualification rules;

·       Issuers that have failed to

file the annual reports

required under Regulation Crowdfunding during the

two years immediately

preceding the filing of the offering statement

In addition to the existing eligibility criteria, issuers wishing to rely on the temporary rule amendments must also meeting the following criteria:

·       The issuer cannot have been organized and cannot have been operating less than six  months prior to the

commencement of the offering; and

·       An issuer that has sold

securities in a Regulation

Crowdfunding offering in the past, must have complied with the requirements in section 4A(b) of the Securities Act and the related rules.

Offers permitted After the issuer files the offering statement (including financial statements), investors may make investment commitment offers. The issuer may file an offering statement with financial statements intentionally omitted (if not otherwise available). However, financial statements must be included in an amendment to the Form C and provided to investors prior to accepting investment commitments. Issuer must prominently disclose that: (i) the financial information that has been omitted is not otherwise available and will be provided by an amendment; (ii) the investor should review the complete set of offering materials, including previously omitted financial statements, prior to making an investment decision; and (iii) no investment commitments will be accepted until after financial statements have been provided.
Investment commitments accepted Investment commitments may be accepted any time after the issuer files the offering statement (including financial statements). Investment commitments may be accepted any time after filing of an offering statement that includes financial statements or an amended offering statement that includes financial statements.
Financial statements required when the issuer is offering more than

$107,000 and not more

than $250,000 in a 12-month period

If an issuer is offering more than $107,000 and not more than $250,000 in a 12-month period, the issuer must include in the offering statement financial statements of the issuer reviewed by a public accountant that is independent of the issuer. If an issuer is offering more than $107,000 and not more than $250,000 in a 12-month period and reviewed or audited financial statements are not otherwise available, the issuer must include the following in the offering statement: (i) financial statements of the  issuer and (ii) certain information from the issuer’s Federal income tax returns, both certified by the principal executive officer. The issuer must prominently disclose that the financial statements have been reviewed by a principal executive officer rather than a public accountant.
Timing of sales   After information in an offering statement is publicly available for 21 days, securities may be sold. The temporary rule suspends the 21 day requirement, and therefore as soon as offering statement is publicly available and an issuer has received binding investment commitments covering the target offering amount, securities may be sold. (Note: this scenario assumes that the financial information requirements have been met.)
Early closing Once the target offering amount is reached the issuer may close the offering if:

·       The offering remains open

for a minimum of 21 days;

·       The intermediary provides

notice about the new

offering deadline at least

five business days prior to

the new offering deadline;

·       Investors are given the

opportunity to reconsider

their investment decision

and to cancel their

investment commitment

until 48 hours prior to the

new offering deadline; and

·       At the time of the new offering deadline, the issuer continues to meet or exceed the target offering amount

The issuer may close the offering as soon as binding commitments are received reaching target offering amount if:

·       The issuer has complied with the disclosure requirements in the temporary rule amendments;

·       The intermediary provides notice that the target offering amount has been met; and

·       At the time of the closing of the offering, the issuer continues to meet or exceed the target offering amount

Investor cancellations of investment commitments An investor may cancel an investment commitment for any reason until 48 hours prior to the deadline identified

in the issuer’s offering materials. Thereafter, an investor is not able to cancel any investment commitments made within the final 48 hours of the offering (except in the event of a material change to the offering).

An investor may cancel an investment commitment for any reason for 48 hours from

the time of the investor’s

investment commitment (or such

later period as the issuer may designate). After such 48 hour

period, an investment commitment may not be cancelled unless there is a material change to the offering. The issuer must describe the process to cancel an investment commitment including: (i) that investors may cancel an investment commitment for any reason within 48 hours the time of an investment commitment (or such later period as the issuer may designate); (ii) the intermediary will notify investors when the target offering amount has been met; (iii) the issuer may close the offering at any time after it has aggregate investment commitments for which the 48-hour right to cancel (or such later period as the issuer may designate) has elapsed that equal or exceed the target offering amount (absent a material change); and (iv) if an investor does not cancel an investment commitment within 48 hours from the time of the binding investment commitment, the funds will be released to the issuer upon closing of the offering and investor will receive securities in exchange for the investment.

 

Any issuer relying on any of the temporary rules must include a statement that the offering is being conducted on an expedited basis because of COVID-19-related circumstances and pursuant to the SEC’s temporary regulatory COVID-19 relief. The temporary rules are effective May 4, 2020 through March 1, 2021, and the temporary rules apply to securities offerings initiated under Regulation Crowdfunding between May 4, 2020 and August 31, 2020.