Crowdfunding Biomass Projects
The times of funding biomass-based projects easily are long gone, and project deals have been a hard sell recently. But a new law may make it much easier for companies to find investors. The bipartisan Jumpstart Our Business Startups (JOBS) Act contains some of the most significant changes in decades to the rules governing how small companies raise money
As a general rule, offerings of securities that are not done through an IPO are prohibited from using any means of general solicitation or general advertising, which includes communications in newspapers, magazines, television, radio, the Internet, public meetings and more. For example, the current rules do not allow the distribution of letters to everyone in a co-op about a new investment opportunity, and violation of the rule can lead to a Securities Exchange Commission or state enforcement action that requires investor money to be returned.
The JOBS Act removes this barrier for offerings conducted under SEC Rule 506 if all purchasers are accredited investors. Once the SEC adopts the new rules, companies can hold public meetings, advertise, do interviews, post online, and mail letters to large groups. This will make it significantly easier for a company to find and meet with potential investors.
Crowdfunding generally refers to raising money from lots of people, each contributing a small amount, typically via the Internet. The practice has been used to raise money through donations for nonprofits or artistic projects, but now it can be used for the sale of securities. The JOBS Act allows companies to sell securities, provided four criteria are met: the aggregate amount sold by the issuer during the preceding 12-month period cannot exceed $1 million; the aggregate amount sold to any investor during the preceding 12-month period cannot exceed certain limits tied to the income or net worth of the investor, with a maximum of $100,000; the transaction must be conducted through an intermediary that is either a broker or a funding portal that complies with registration, disclosure and other requirements, and is registered with any applicable stock exchange or self-regulatory organization; and the issuer must comply with various filing and disclosure requirements.
Issuers seeking to take advantage of the crowdfunding exemption must file with the SEC and provide key information about the company and its financial condition, large shareholders, officers, use of proceeds and anything else the SEC deems necessary to protect investors.
Every crowdfunding offering must also include a minimum amount determined by the issuer that must be reached before any proceeds are delivered to the issuer. This target offering amount must be disclosed to investors, and the intermediary is obligated to ensure that all offering proceeds are provided to the issuer only when the target offering amount is reached.
The aggregate amount sold to any investor is subject to limits based on the income or net worth of the investor. If either the annual income or the net worth of the investor is less than $100,000, the investor may not purchase more than $2,000 or 5 percent of the annual net income or net worth of the investor. If either the annual income or net worth of the investor is equal to or more than $100,000, the investor may not purchase more than 10 percent of the annual income or net worth of the investor, up to $100,000.
While the SEC has to write and adopt formal rules for each of these provisions, they are no doubt significant positive changes for companies trying to raise money. While crowdfunding may not help build a large plant, it will help raise seed capital to start developing projects. Permitting, advertising and public meetings for larger offerings will help companies raise the larger equity required to conduct serious research and development, or build plants.
Authors: Bert Ranum
Shareholder, Fredrikson & Byron
Attorney, Fredrikson & Byron