Did You Know That Foreign Issuers Can Also Rely On Regulation Crowdfunding?

It is a little-known fact that foreign companies can use Regulation Crowdfunding (Regulation CF) to raise capital from accredited and non-accredited investors in the United States (U.S.). It is a commonly held belief that Regulation CF is available only to U.S. domiciled companies with a principal place of business, operations and executive officers located inside the U.S. While the eligibility requirements of Regulation CF indicate that the issuer be organized under the laws of a state or territory of the U.S. or the District of Columbia, the eligibility requirements do not indicate that the issuer must have a principal place of business inside the U.S. In light of this nuance, foreign companies can rely on Regulation CF to raise capital by undergoing a simple restructuring process that allows them to maintain most operations outside of the U.S. Bevilacqua PLLC confirmed this approach with the Office of Small Business Policy at the U.S. Securities and Exchange Commission (SEC).

Restructuring to Raise Capital

Before using Regulation CF, a company that is organized under foreign laws must first undergo a simple restructuring process to establish an entity organized under the laws of a state or territory of the United States or the District of Columbia such as a Delaware or Nevada holding company. The next step in this approach is to execute a share exchange between the owners of the foreign company and the newly formed U.S. entity (e.g., corporation or limited liability company). This means that the owners of the foreign company will exchange their equity interest in the foreign entity for newly issued shares of the U.S. entity and the U.S. entity will become a holding company that owns the foreign entity as its wholly-owned subsidiary. This part of the restructuring process is delicate and the type of transaction we just described should be carefully evaluated by an experienced tax advisor not only to ensure that there are no unintended tax consequences but also compliance with applicable foreign laws.

How Much Capital Can You Raise under Regulation CF?

Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 (Title III) added Section 4(a)(6) to the Securities Act of 1933. The SEC adopted Regulation CF to implement the requirements of Title III. In a nutshell, issuers relying on Regulation CF are permitted to raise a maximum aggregate amount of $1,070,000 in a 12-month period from both accredited and non-accredited investors by utilizing a FINRA member funding portal as an intermediary and may employ general solicitation and advertising during the offering. For purposes of determining the maximum aggregate amount that may be sold in a Regulation CF offering, an issuer does not have to include aggregate amounts sold in other exempt offerings.