SEC Offers an Elixir for Small Businesses Feeling the Financial Effects of COVID-19

Written by Mark T. Hiraide

In response to the ill effects the coronavirus pandemic is having on business, the Securities and Exchange Commission on May 4, 2020 adopted a temporary final rule to make it easier for existing businesses to raise up to $250,000 through Regulation Crowdfunding.

Under the relaxed rules, which are in effect only until August 31, 2020, a business is excused from complying with the Regulation Crowdfunding requirement to have its financial statements reviewed by an independent public accountant. During this limited period, the SEC is requiring only certain information from the business’ Federal income tax returns certified by the principal executive officer. That represents a significant time and financial savings for companies – especially small businesses – that need a quick infusion of capital during rough times caused by the COVID-19 virus.

To be eligible, the business must have been organized and have had operations for not less than six months prior to the commencement of its securities offering. The relaxed rules are not available to recently formed startups. Other eligibility requirements include that the business must be a U.S. company and must be in compliance with Regulation Crowdfunding if it has previously conducted an equity crowdfunding offering under the regulation.

Equity crowdfunding was made legal by the Jumpstart Our Business Startups (JOBS) Act of 2012. The SEC promulgated Regulation CF in 2016. Under these regulations, businesses may raise up to $1.07 million in equity crowdfunding offerings conducted on SEC-sanctioned online crowdfunding portals. The SEC recently proposed to increase the offering limit under Regulation CF to $5 million.

About the Author
Mark Hiraide is the author of a bill to amend the California Corporate Securities Law (AB-2069 [Muratsuchi], introduced on February 4, 2020), which will allow on a permanent basis businesses to raise up to $300,000 in California under Regulation Crowdfunding without a review by a certified independent accountant. For more information about raising capital under Regulation CF, Regulation A+ and Regulation D of the Securities Act of 1933, see his article, Ready Capital.

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