Benjamin Farber, Crowdfunding Regulations During COVID-19

Raising money became easier for companies – and few people know

Lost on some in the Covid-19 news cycle was an initiative by the U.S. Securities and Exchange Commission that could help smaller companies as they raise money.

The initiative, albeit temporary, relaxes crowdfunding regulations and provides a route for eligible businesses directly or indirectly affected by the pandemic to speed up the offering process. It cuts out some of the rules and red tape that have traditionally made crowdfunding difficult, said Alexander McClean, partner at Harter Secrest & Emery LLP.

“It just (previously) made it a little burdensome for what are really early stage companies to take advantage of equity crowdfunding,” he said.

Benjamin Farber, partner at Phillips Lytle LLP, said the SEC’s changes provide another avenue to help level the playing field for private companies.

“This is another way for companies to raise money,” Farber said. “The intent on the SEC’s part or the measures here are to make this an easier process. The general idea behind it all is to help facilitate the raising of more capital for companies that are in desperate need of the money.”

The attorneys are based in Rochester and Albany, respectively, but handle securities work for businesses in Western New York.

The changes took hold May 4 and last through at least Aug. 31 if not extended by the SEC.

Previously, McClean said companies had to wait 21 days from when the offering was posted on an online portal before they could start to accept security payments from investors.

“That just creates a delay,” he said. “One of the things (the SEC) did was suspend that requirement through the end of August, so it makes it a little easier for companies to raise money quickly.”

An investor has up to 48 hours after they pledge to fund a company before it becomes binding. Businesses are required to submit more disclosures to investors.

“There are some reporting requirements on an annual basis that go along with doing this,” Farber said.

He added that businesses should examine the details and see if it makes sense for them.

McClean agreed.

“There are pros and cons to crowdfunding and it’s not for everyone, but for those businesses that have found this is the best option for them, a lot of the companies just aren’t aware of these relaxed requirements,” he said. “For companies that have been impacted by Covid-19 who have been looking at equity crowdfunding as a potential alternative, they should be encouraged to strike while the fire is hot.”