The Securities and Exchange Commission (SEC) adopted final rules allowing small companies to publicly raise money. The proposed rule change had been expected since the passage of the Jumpstart Our Business Startups (JOBS) act. This is a step toward allowing companies to sell equity via crowdfunding.

There are two aspects to the rule change, which differ by the size of a company’s offerings. Tier 1 consists of securities offerings of up to $20 million in a 12-month period. Tier 2 consists of securities offerings of up to $50 million. Participation by security-holders (e.g., shareholders) who are affiliates of the issuing companies is capped at $6 million for Tier 1 companies and $15 million for Tier 2 companies. Participation by selling security-holders is further capped at 30% of the issuer’s initial and subsequent offerings for the first 12 months following the initial offerings.

Tier 2 companies must also provide audited financial statements; file annual, semiannual and current event reports; and limit purchases by non-accredited investors (individuals who don’t meet high income or wealth requirements) to no more than 10% of the investor’s annual income or net wealth. Tier 2 issuers will be exempt from the SEC’s registration requirements if they meet certain conditions including a public float (shares available for trading on public exchanges) of less than $75 million or, in the absence of a public float, annual revenues of less than $50 million.

To be eligible, a company must be organized in and have its principal place of business in the United States or Canada and not already be an SEC-reporting company. Excluded for these type of offerings are companies without a specific business plan; those that have indicated their intention to merge with an unidentified company; those seeking to sell asset-backed securities (e.g., mortgage-backed securities) or fractional undivided interests in oil, gas or other mineral rights; those that have not filed reports required by the rules within the past two years; or those that are disqualified under the “bad actor” rules.

Keep in mind that the amount of information provided by either Tier 1 or Tier 2 companies may be very limited. Investors should treat such companies as highly risky and not allocate any funds to them that are needed for long-term or other financial goals.

Source: “SEC Adopts Rules to Facilitate Smaller Companies’ Access to Capital,” Securities and Exchange Commission, March 25, 2015.