SEC Releases New Compliance & Disclosure Interpretations On Regulation Crowdfunding

---

Yesterday, the SEC’s Division of Corporate Finance released two new Compliance & Disclosure Interpretations (C&DIs) answering questions related to Regulation Crowdfunding (Reg CF). CD&Is are the Commission’s way of giving some informal guidance, through a question and answer format, on how its staff members interpret certain rules. They are not binding and should not be relied upon.

Threshold for Related Party Transactions

The first interpretation released yesterday concerns disclosure requirements under Rule 201 of Reg CF:

Question: Rule 201(r) requires the issuer to disclose any related party transaction that exceeds 5% of the amount raised by the issuer in reliance on section 4(a)(6) during the preceding 12-month period, including the amount the issuer seeks to raise in the current offering. An issuer sets a target offering amount (i.e., the minimum amount of investment commitments needed for the offering to close) in a Regulation Crowdfunding offering, but will accept offering proceeds in excess of the target offering amount up to a specified maximum amount. Which dollar amount should the issuer use to determine the threshold at which disclosure of related party transactions is required under Rule 201(r)?

 

Answer: The issuer should determine the threshold for disclosure of related party transactions based on the target offering amount plus any amount already raised in reliance on 4(a)(6) in the preceding 12-month period. For example, if an issuer that raised $60,000 in reliance on section 4(a)(6) in the previous 12-month period sets a $100,000 target offering amount but will accept offering proceeds of up to $940,000, the issuer would need to disclose related party transactions of more than $8,000 (5% of $160,000, which is the sum of the $100,000 target offering amount plus the $60,000 previously raised).

Issuers have to calculate the 5% threshold for disclosing any related party transactions based on the target offering amount (the minimum offering amount) plus any amount already raised in reliance of Section 4(a)(6) (i.e. under a Reg CF offering) within the last 12 months. (5% of [target amount + amount already raised in the last year] = disclosure threshold for related party transactions). The interpretation clarifies that the threshold is based on the minimum offering amount, not the maximum amount, the issuer seeks in the offering. This could impact issuers who set lower target amounts because it could mean that the threshold for reporting related party transactions would be much lower as a result.

Termination of Ongoing Reporting Requirement

The second interpretation is in regards to ongoing reporting requirements under Rule 202:

Question: How does an issuer calculate the number of holders of record for purposes of determining eligibility to terminate its duty to file ongoing reports pursuant to Rule 202(b)(2) of Regulation Crowdfunding?

 

Answer: The issuer would count all holders of record of securities of the same class of securities issued in the Regulation Crowdfunding offering for which the reporting obligation exists, regardless of whether the holders of record purchased their securities in the Regulation Crowdfunding offering.

Rule 202(b)(2) states that if an issuer has filed at least one annual report and has less than 300 shareholders of record, the issuer’s ongoing reporting requirements are terminated. This interpretation means that the issuer has to count all shareholders within the class, even ones that didn’t purchase their shares in the Reg CF offering, towards the 300 shareholder limit. That means that even though an issuer may have sold shares under Reg CF to less than 300 people, if they issued the same class of shares to other people outside the Reg CF offering which increased the number of people in that class to over 300 shareholders, they are still bound by the ongoing reporting requirements.