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Law360 (May 4, 2020, 7:32 PM EDT) -- The U.S. Securities and Exchange Commission on Monday unanimously approved a temporary rule allowing companies to file crowdfunded offerings without immediately submitting financial statements, a move intended to jump-start capital raising amid the coronavirus pandemic.
The SEC's 61-page rule states that companies seeking to raise capital through crowdfunding may initially omit financial statements if they aren't available, so long as such documents are provided by the time that company secures firm commitments from investors.
The temporary rule seeks to make it easier for companies to launch capital-raising campaigns despite the obstacles posed by social-distancing requirements. SEC Chairman Jay Clayton said the rule aids small companies with "pressing capital needs" while maintaining investor protections.
"In the current environment, many established small businesses are facing challenges accessing urgently needed capital in a timely and cost-effective manner," Clayton said in a statement.
The SEC approved the action by a 4-0 vote. The rule is in effect through Aug. 31.
Equity crowdfunding allows companies to raise up to $1.07 million annually from mom-and-pop investors, either through an online portal or broker-dealer, without filing a full-blown registration statement. Authorized by the Jumpstart Our Business Startups Act of 2012, the idea behind crowdfunding is to enable small local companies to efficiently raise capital from their followers.
Monday's temporary rule also allows issuers raising between $107,000 and $250,000 over a 12-month period to proceed with an offering with financial statements that are certified by the company's CEO, rather than reviewed by an accountant as normally required.
Certain ground rules apply in order for issuers to be eligible for relief. Companies can not have been operating for less than six months and, if they have raised money in a crowdfunded offering before, the issuer must have complied with relevant rules in the Securities Act of 1933.
To take advantage of the the temporary rules, the SEC also said that a company must "provide clear, prominent disclosure to investors about its reliance on the relief."
The temporary rule marks the latest of several SEC actions in recent months to provide market participants relief in an effort to keep markets running smoothly amid the pandemic. The agency in March extended certain deadlines associated with crowdfunding reports.
Since SEC rules on crowdfunding took effect in 2015, the market has been slow to embrace this form of fundraising compared with unregistered offerings. The SEC in February proposed raising the annual funding limit to $5 million in an effort to make crowdfunding more attractive.
--Editing by Alanna Weissman.
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