A Primer for Issuers

What is Investment Crowdfunding?

Investment Crowdfunding was born out of an amendment to the 1933 Securities Act. It went into effect in May 2016 and allows for significant changes to the ways small businesses can raise capital for two reasons.

• It gives companies a new exemption from the substantial burdens associated with registered securities.
• It allows companies to access the vast fundraising potential of the “Crowd.”

Other provisions exist which allow companies to use exemptions from securities’ registration requirements, but Investment Crowdfunding (also called ‘equity’ or ‘regulation’ crowdfunding) has essentially opened up a whole new investment asset class by allowing regular people (not just the wealthy) to purchase private small business securities.

At their best, crowdfunded offerings can help you build a network of loyal subscribers who give your company momentum beyond its initial financing round. Crowdfund Mainstreet is designed with this investor-issuer relationship in mind. We want you to use Investment Crowdfunding to find your ideal investors, so you can focus on realizing your vision and contributing to humanity.

Benefits

Reliance on large financial institutions and wealthy accredited investors has caused many a small business owner to make burdensome concessions when raising capital. Notably, such businesses often face intense pressure to grow quickly and get acquired by a larger company. Investment Crowdfunding represents an opportunity to break from this paradigm and raise capital on your own terms. Connecting with investors who share your vision allows you to grow at the pace that is best for you and to put your company’s unique contribution front and center.

Are you Ready to Raise Capital?

The better prepared you are, the more likely you are to succeed. It is worth taking the time to assess where you are and to fully educate yourself on the responsibilities that come with offering securities before you apply. Read the requirements below.

Requirements

Companies raising capital through Investment Crowdfunding are required to fill out Form C and file it with the SEC before launching a live campaign.

You will be asked to complete an application, participate in an interview, pass a background check, and prepare your financial and disclosure information for investors to review and discuss through your campaign page. We will support you through this process, but all the information comes from you and will require you to disclose your company’s financial information.

Transparency is of utmost importance for both regulatory compliance and attracting conscientious investors, some of whom may be new to small business investing. The decision to take on investors and raise capital is a decision and commitment to openly discuss where you are in your business and where you are going once funded. Crowdfund Mainstreet seeks companies that are prepared to embrace this opportunity and meet the responsibilities head on.

Form C

What you are Required to Include in Form C

Some key disclosures you will be asked to include are:

• Information about your company’s officers, directors, and owners holding at least 20% of voting equity shares;
• A description of your company’s business as well as information regarding how you plan to use crowdfunded capital;
• The price of the securities being offered or the method for determining the price;
• The target offering amount and the deadline to meet that target;
• Whether you will accept investments in excess of the target amount and how oversubscriptions will be handled;
• A discussion of the factors which make your offering speculative or risky;
• A description of any transactions between your company and any “related parties”;
• And a description of your company’s financial condition alongside financial statements.

Financial Statements

The financial statement requirements will vary based on the size of your offering and how much you have raised through crowdfunding in the past 12 months.

There is a $5M yearly limit on raising Investment Crowdfunding capital. If you need to raise more than this amount in the space of a year, you may want to combine Investment Crowdfunding with another regulatory compliant strategy. If you need help with this, please feel free to contact us for a referral.

If your offering is $124,000 or less—you must include financial statements for your company as well as total income, taxable income, and total tax as reported on your federal tax income returns. Both of these items must be certified by an executive officer in your company.

If your offering is between $124,000 and $618,000—you must include financial statements that have been reviewed by a public accountant independent of your company.

If your offering is more than $618,000 and you have raised funds through crowdfunding in the past—you must include financial statements that have been audited by a public accountant independent of your company. Note that an audit entails a higher degree of scrutiny than a review. You must always provide the most rigorously examined version of your company’s financial statements—even in cases where an audit or a review is not normally required.

All offerings that exceed $1,235,000 are required to have financial statements that have been audited by a public accountant independent of your company.

Crowdfund Mainstreet’s fees

CMS does not charge a fee to invest. However, companies raising money on the platform may decide to charge an administrative fee to investors for purposes of offsetting their third-party escrow fees. This is permitted. CMS is compensated by issuers in one of three ways:

1. It receives 6.0% of the total raised on each successful campaign and is reimbursed by the issuer at the close or cancelation of a campaign for all fees incurred by CMS and associated with third-party escrow and investment processing (regulations require the use of third-party escrow providers);
2. CMS and the issuer agree that CMS will receive a financial interest in an issuer as compensation for the services provided to, or for the benefit of the issuer, on the same terms, conditions and rights as the securities being offered to investors;
3. A combination of 1&2.

Every campaign has a minimum amount that must be raised in order for you to receive the funds. This minimum, along with the minimum investment amount you set, will be posted on the campaign page you create.

Crowdfund Mainstreet does not dictate what you can offer to investors. In customizing your offering, you may use your own attorneys and CPAs or other advisors to assist you, or we can refer you to an experienced provider who will negotiate a fee for that service on a case-by-case basis.

Eligibility

In order to raise funds on Crowdfund Mainstreet or any other Investment Crowdfunding platform, companies must meet certain criteria set by the SEC.

• You Must:
  • Be a U.S. company;
  • Be in compliance with annual reporting requirements—if you have already raised funds through crowdfunding;
  • Have a specific business plan, which does not consist of merging with or being acquired by another, unidentified company.
• You Must Not:
  • Be a reporting company under the Exchange Act (meaning you are required to register all offerings with the SEC);
  • Knowingly involve any so-called “Bad Actors” in your offering (see below);
  • Or raise more than $1,235,000 a year through crowdfunding.

The Bad Actor Rule

The SEC mandates that a company will be barred from using Investment Crowdfunding if its management team or any other “covered persons” are found to be Bad Actors. It is essential that you understand what it means to be a Bad Actor as well as which people count as covered persons. You are required to make a factual inquiry into the history of these persons or risk having your offering canceled.

Covered persons will be deemed Bad Actors if they have committed or been subject to the following:

• Criminal Convictions — any felony or misdemeanor conviction within the last 10 years involving the sale of securities or the making of a false filing with the SEC or which arises from the conduct of an underwriter, broker, dealer, municipal securities dealer, investment advisor, funding portal, or paid solicitor of purchasers of securities.
• Court Injunctions and Restraining orders — any court order (issued within the last 5 years) which limits a person’s action in connection with securities; involves the making of a false filing with the SEC; or which arises from the conduct of an underwriter, broker, dealer, municipal securities dealer, investment advisor, funding portal, or paid solicitor of investors.
• Final Orders of Certain Regulators — a final order from any state securities commission; state authority supervising banks/savings associations/credit unions; state insurance commission; appropriate federal banking agency; the U.S. Commodity Futures Trading Commission; or the National Credit Union Administration that:
  • Bars the person from associating with any entities regulated by the agency;
  • Bars the person from engaging in the business of securities, insurance, or banking;
  • Bars the person from engaging in savings association or credit union activities;
  • Or which is based upon any law or regulation prohibiting fraud or deceptive conduct (filed within the 10 years prior to an offering)
• SEC Disciplinary Orders – orders from the SEC suspending or revoking a person’s registration as a broker, dealer, municipal securities dealer, investment advisor, or funding portal; or which places any limitations on the activities or functions of such a person; or which bars them from associating with any entity participating in the offering of any penny stock.
• SEC Cease and Desist Orders – orders from the SEC (within 5 years prior to the offering) that compel a person to cease violating certain anti-fraud provisions of federal securities laws.
• Suspension or Expulsion from an SRO – suspension or expulsion from any self-regulatory organization for any act inconsistent with just and equitable principles of trade.
• Regulation A Suspension – any order from the SEC suspending or investigating a Regulation A exemption that was either filed by a covered person (within the last 5 years) or which the person worked on as an underwriter.
• U.S. Postal Service False Representation – any restraining order or false representation order issued by the U.S. Postal service within the last 5 years on the basis of conduct aimed at obtaining money or property through the mail by means of false representation.

Covered Persons

Persons relevant to your offering are considered “covered persons”. If any of these people have experienced a disqualifying event, your use of Investment Crowdfunding might be disrupted. For this reason, it is important to understand who counts as a covered person and to conduct your inquiries early on.

Covered Persons Include:

• The company, including its predecessors and affiliated users;
• Any directors, officers, general partners, or managing members of the issuer;
• Beneficial owners of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
• Any promoters connected with the issuer in any capacity at the time of the offering;
• And any persons compensated for soliciting investors, including the general partners, directors, officers, or managing members of any such solicitor.

Waivers and Exemptions

Exemptions are available for issuers who have experienced a disqualifying event under the following circumstances:

• The issuer is able to demonstrate that they did not know, and in the exercise of reasonable care, could not have known that one or more covered persons experienced disqualifying events prior to participating in the offering;
• The court or regulatory that issues the relevant order specifies that disqualification under Regulation Crowdfunding should not arise as a consequence of such order;
• Or the issuer obtains a waiver upon satisfactorily demonstrating to the SEC that they should not be barred from using Regulation Crowdfunding.

For reference to more complete information about the Bad Actor Rule as well as covered persons and possible exemptions, please see Rule 503 of Regulation Crowdfunding

Crowdfund Mainstreet’s Criteria for Founders

We look at the experience of the founders and the teams they build.

Financing Strategy

We allow companies to craft their offerings using any permitted legal strategy they choose.

Impact/Industry Analysis

We ask Companies to assess and share their vision for the impact or change they believe they will have on their community, an industry, a problem, and/or the planet. Companies must also add this information to their campaign pages for potential investors to see and discuss.

Companies must be US based

We also recommend that companies enlist the services of their trusted professionals or incubator programs to assist with thorough application submittal. Raising capital is serious business, and you will need to be prepared. We have created strategic partnerships to help guide you through this process so getting started can be as easy as getting in touch.

Once your application has been accepted by Crowdfund Mainstreet, you will build a unique campaign page where all the relevant information, disclosures, and discussions with investors about your campaign will take place. Investors are required to sign up before participating in a campaign discussion group.

Changing Your Offering

Under Investment Crowdfunding, you are permitted to make changes to your offering at any time provided you file Form C/A disclosing what changes, additions, or updates you have made.

If you make material changes to your offering, we will notify your investors. They will then be given five business days from receipt of the notice to reconfirm their investment. If they do not, their investment will be canceled.

Ongoing Obligations

Annual Updates

After a successful crowdfunding campaign, you will be required to file with the SEC via Form C-AR and post to your company’s website, an annual report, along with financial statements no later than 120 days after the end of each fiscal year. Form C-AR requires disclosures of many of the same terms found on the original offering statement. The information on this form must be certified by your company’s principal executive officer to be true and complete. If, however, you have financial statements that have been reviewed or audited by an independent public accountant, those financial statements must be provided and principal executive officer certification is not required. See Footnote for further details pertaining to financial statements.

The annual report also must include the following disclosures:

• Your company name, legal status (including its form of organization, jurisdiction in which it is organized, and date of organization), physical address, and website;
• The names of the directors and officers (and any persons occupying a similar status or performing a similar function) of the company, all positions, and offices with the company held by such persons, the period of time in which such persons served in their position or office and their business experience during the past three years, including:
  • Each person’s principal occupation and employment, including whether any officer is employed by another employer; and
  • The name and principal business of any corporation or other organization in which such occupation and employment took place.
  • The name of each person, as of the most recent practicable date but no earlier than 120 days prior to the date the offering statement or report is filed, who is a beneficial owner of 20 percent or more of the company’s outstanding voting equity securities, calculated on the basis of voting power;
  • A description of the company’s business and its anticipated business;
  • The current number of employees of the company;
  • A discussion of the material factors that make an investment in the company speculative or risky;
  • A description of the ownership and capital structure of the company, including:
    • The terms of the securities being offered and each other class of security of the company, including the number of securities being offered and/or outstanding, whether or not such securities have voting rights, any limitations on such voting rights, how the terms of the securities being offered may be modified and a summary of the differences between such securities and each other class of security of the company, and how the rights of the securities being offered may be materially limited, diluted or qualified by the rights of any other class of security of the company;
    • A description of how the exercise of rights held by the principal shareholders of the company could affect the purchasers of the securities being offered;
    • The name and ownership level of each person, as of the most recent practicable date but no earlier than 120 days prior to the date the offering statement or report is filed, who is the beneficial owner of 20 percent or more of the company’s outstanding voting equity securities, calculated on the basis of voting power;
    • How the securities being offered are being valued, and examples of methods for how such securities may be valued by the company in the future, including during subsequent corporate actions;
    • The risks to purchasers of the securities relating to minority ownership in the company and the risks associated with corporate actions, including additional issuances of securities, company repurchases of securities, a sale of the company or of assets of the company or transactions with related parties; and
    • A description of the restrictions on the transfer of the securities, as set forth in the federal regulations;
  • A description of the material terms of any indebtedness of the company, including the amount, interest rate, maturity date, and any other material terms;
  • A description of exempt offerings conducted within the past three years, including:
    • The date of the offering;
    • The offering exemption relied upon;
    • The type of securities offered;
    • The number of securities sold and the use of proceeds;
  • A description of any transaction since the beginning of the company’s last fiscal year, or any currently proposed transaction, to which the company was or is to be a party and in which the amount involved exceeds five percent of the aggregate amount of capital raised by the company in reliance on the crowdfunding exemption during the preceding 12-month period and in which any of the following persons had or is to have a direct or indirect material interest:
    • Any director or officer of the company:
    • Any person who is, as of the most recent practicable date but no earlier than 120 days prior to the date the offering statement or report is filed, the beneficial owner of 20 percent or more of the company’s outstanding voting equity securities, calculated on the basis of voting power;
    • If the company was incorporated or organized within the past three years, any company promoter; or
    • Any member of the family of any of the foregoing persons, which includes a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships. The term spousal equivalent means a cohabitant occupying a relationship generally equivalent to that of a spouse.
  • Whether the company or any of its predecessors previously failed to comply with the ongoing reporting requirements of the crowdfunding regulations.

You will be released from your annual reporting obligations as soon as:

• Your company files for an IPO;
• You have filed at least one annual report and have fewer than 300 holders of record;
• You have filed your third annual report and your company’s assets do not exceed $10 million;
• You or another entity repurchases all of the securities sold in the crowdfunded offering (or all debt securities have been repaid and all redeemable securities redeemed);
• Or your company liquidates or dissolves in accordance with state law.

Advertising Restrictions

Solicitations of interest and other communications.

Solicitation of interest. At any time before the filing of an offering statement, an issuer may communicate orally or in writing to determine whether there is any interest in a contemplated securities offering.

Such communications are deemed to be an offer of a security for sale for purposes of the antifraud provisions of the Federal securities laws. No solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, from any person is permitted until the offering statement is filed.

The communications must:

(1) State that no money or other consideration is being solicited, and if sent in response, will not be accepted;

(2) State that no offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only through an intermediary’s platform; and

(3) State that a person’s indication of interest involves no obligation or commitment of any kind.

Indications of interest. Any written communication under this section may include a means by which a person may indicate to the issuer that such person is interested in a potential offering. This issuer may require the name, address, telephone number, and/or email address in any response form included pursuant to this paragraph (c).

Once Form C has been filed, your company may advertise in whatever way it chooses (e.g. social media posts, emails). However, all advertisements must direct investors to crowdfundmainstreet.com or crowdfundmontana.com and be limited to the following:

• A statement indicating that your company is conducting an offering through Crowdfund Mainstreet along with a link to your offering page;
• The terms of your offering include: the price and nature of securities, the number of securities being offered, and the offering deadline;
• And factual information about your company’s legal identity and location. At most, you may include the name of your company, its address, its phone number, its website, the email address of one of your company’s representatives, and a brief overview of your business.

Crowdfund Mainstreet (and its other trade name sites) will provide additional channels for interacting directly with potential investors provided that you or anyone representing your company disclose their status as a representative. Persons paid to promote your company on Crowdfund Mainstreet are likewise required to disclose their status.

Resale Restrictions

Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year, unless the securities are transferred:

• To the issuer of the securities;
• To an “accredited investor”;
• As part of an offering registered with the Commission; or
• To a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstances.

Shareholder Limits

Section 12g of the Exchange Act requires that private companies with more than 2,000 shareholders take up additional reporting responsibilities with the SEC.

In all likelihood, this isn’t something you need to worry about. Investors in your crowdfunded offering won’t count towards this limit provided that your company:

• Is current in its annual reporting responsibilities;
• Retains the services of a transfer agent registered with the SEC;
• And has less than $25 million in assets as of the end of the last fiscal year.

If your company does acquire more than $25 million in assets, it will be subject to shareholder limits. However, you will be granted a two-year transition period before being required to register your securities—so long as you stay current in your annual reporting obligations.

Glossary of Terms

Escrow

A legal practice whereby an asset or financial instrument is held by a third party pending transfer from one party to another.

This third party is known as an escrow agent. Escrow agents are beholden to both parties involved in a transaction and will only release the funds held in escrow when all predetermined contractual requirements have been met.

Transfer Agent

Typically, banks or other, similar financial institutions act as transfer agents. Their responsibilities include keeping track of the certificates issued to investors upon the purchase of securities. Broadly speaking, they keep track of a company’s outstanding securities and its obligations to investors.

SRO

A “self-regulatory organization” is a non-government entity with the power to create and enforce standards and regulations for a particular industry. Examples include stock exchanges and the Financial Industry Regulatory Authority (FINRA).

FAQ

When can I accept funds?

For the duration of your offering, the capital you raise will be held in escrow. When the offering is over, and the minimum investment amount has been raised, the funds (less escrow fees) will be distributed to you.

Can I create a profile before I start fundraising?

You may apply at any time. Once approved, you may begin creating your campaign page. Your campaign will go live once all regulatory requirements have been met.

Can I end my offering early?

If you reach your target offering amount prior to the deadline identified in your offering materials, you may close the offering on a date earlier than the deadline identified in the offering materials, provided that:

• The offering remains open for a minimum of 21 days;
• Crowdfund Mainstreet provides notice to any potential investors, and gives or sends notice to investors committed to the offering of:
  • The new, anticipated deadline of the offering;
  • The right of investors to cancel investment commitments for any reason until 48 hours prior to the new offering deadline; and
  • Whether you will continue to accept investment commitments during the 48- hour period prior to the new offering deadline.
• The new offering deadline is scheduled for and occurs at least five business days after Crowdfund Mainstreet provides the required notice in item 2 above.

Can I extend the deadline of my campaign?

In some circumstances, this will be permitted. Note that this would constitute a material change, however, meaning anyone participating in your offering will be required to reconfirm their investment.

How long do campaigns on Crowdfund Mainstreet typically last?

60- 120 days.

Can companies pay to be featured on Crowdfund Mainstreet’s front page?

No. All campaigns are featured on the platform in the same manner on a rotating basis.

How does Crowdfund Mainstreet sort offerings?

Offerings can be sorted by time (new or closing soon for example), industry (tech, clean energy, co-op, etc.), Company location, minimum investment or minimum/maximum raise, as well as any other objective criteria investors’ preferences indicate.

What happens if my campaign fails?

If your campaign doesn’t meet its minimum investment target, Investors who made investment commitments will have their investments returned. In other words, you won’t receive any capital.

What is the minimum amount that Crowdfund Mainstreet will approve?

Due to the costs of Investment Crowdfunding, and the availability of resources for smaller capital needs, Crowdfund Mainstreet does not accept applicants that have a minimum investment target below $50,000. Crowdfund Mainstreet may make exceptions to this general rule on a case-by-case basis.

Are there any types of businesses Crowdfund Mainstreet will not host?

Crowdfund Mainstreet does not accept companies engaged in federally illegal activities. The Crowdfund Mainstreet platform is owned by a Public Benefit Corporation dedicated to promoting entrepreneurship as a means of economic opportunity for those individuals and areas of the country that have struggled since the demise of the industrial economy. We are dedicated to education for small businesses and the investors who support them. We actively solicit firms that face challenges securing mainstream forms of financing.

Does Crowdfund Mainstreet support any fundraising exemptions apart from Investment Crowdfunding?

No.

Do companies need to be incorporated in a certain way to raise funds on Crowdfund Mainstreet?

No.

What types of securities can I offer on Crowdfund Mainstreet?

Crowdfund Mainstreet does not restrict the types of securities that may be offered on the platform. Crowdfund Mainstreet believes strongly that each business should be raising capital on its own terms and that it is not for us to decide what that looks like. Ultimately, it is up to the investors to evaluate any particular offering.