SEC Yet to Create Rules to Regulating Corporate Crowdfunding

Technological breakthroughs have always posed a problem for regulators, but social media seems to have lately created even larger regulatory headaches in the area of corporate law.

The Securities and Exchange Commission, for example, is currently reviewing the public/private nature of disclosures made via Facebook in a case involving the CEO of Netflix.

In 2009, the SEC put a stop to the crowdfunding attempt to buy the Pabst Blue Ribbon beer company, as regulations at the time considered it a sale of securities that had not been registered. SEC regulations under Rule 506 allow a certain amount of privately offered securities, but the number is limited to 35 non-accredited investors (investors outside of a specific class of investors presumed to be able to cover their investments), a number largely exceeded by the nearly 5 million separate investors that raised nearly $300 million to buy PBR.

Congress took note of this crowdfunding attempt and decided to encourage this innovative use of the Internet to raise capital, including provisions in the Jumpstarting Our Businesses Act (”JOBS Act”), signed into law on April 5, 2012. The potential effect of this legislation, according to attorney Rich Mains of Stoll Keenon Ogden, could be game-changing for some small businesses in need of capital.

“Crowdfunding involves raising a small amount of money from each of lots of individual investors over the Internet. Historically, the securities laws made such an effort cost-prohibitive and impractical, so capital has usually been raised either through small, private groups of investors or a publicly registered offering, which is an expensive and time-consuming process. Crowdfunding potentially opens up investing in start-ups to everyone, and especially those who want to invest only a small amount,” said Mains.

Mains suggested that crowdfunding would open up opportunities for start-ups with good concepts that don’t have access to wealthier investors. The capital formation process effectively becomes democratized. The legislation provides guidelines for how this process will occur.

“We do know from the legislation that small companies would be able to raise up to $1 million every 12 months through crowdfunding, the securities would only be offered over the Internet through regulated sites and the company would have to disclose to potential investors material information about its business, the investment opportunity and its financial health,” said Mains. “Depending on the amount of capital sought to be raised, a company may have to have accountant-reviewed or audited financial statements. Investors will be limited on the amount they may invest — between $2,000 and $100,000, depending on the investor’s income and net worth.”

The devil, however, still remains in the details: the regulations governing all of these transactions, such as “disclosures related to risks and other investor education materials,” (15 USC § 77d–1(a)(3)), do not yet exist. The legislation contained provisions requiring the Securities and Exchange Commission to create rules regulating crowdsourcing for capital formation within 270 days of the passage of the act. Over a year after the bill became law, the SEC has yet to create regulations to guide this form of investment.

“The offer and sale of securities through crowdfunding will not be permitted until new SEC rules are in effect, and we do not yet know the specifics of the new rules,” said Mains.

Existing notions of crowdfunding — used primarily by artists and musicians through such sites as Kickstarter and Indiegogo — will remain largely unaffected by this legislation.

“Crowdfunding sites where the contributor receives no stake in the company, such as funding part of a creative project where the contributor expects nothing in return except a free music download, are arguably not offering or selling a security. Since a security is not involved, this type of fundraising falls outside the jurisdiction of securities regulators,” said Mains.

Still, this new form of crowdfunding capital could impact existing crowdfunding in other ways, according to Mains.

“It is possible that after the SEC makes its new rules, some creative projects may begin to offer equity or debt investment opportunities, if it seems likely that potential supporters will prefer this over the now prevalent rewards model. While the rewards model will likely continue to have some success for interesting projects and ideas, it may start to face competition from entrepreneurs and artists that are willing to share ownership.”

Those businesses looking to raise capital through crowdfunding should be wary, however. The SEC’s rules could have significant consequences for those who run afoul of them, according to Mains.

“Also, a successful crowdfund could result in hundreds, or even thousands, of very small owners or lenders. Managing this many investors would be time consuming and expensive, especially for a new or small business. Detailed plans should be made in advance to manage a large number of investors and the consequences of having that many stakeholders.”

These challenges are compounded when dealing with dividends and providing returns on those investments.

“One of the challenges for a crowdfund company that ends up with lots of investors will be the cost and mechanics of communicating with investors and paying dividends. For a small company with lots of owners, that would involve large mailings every time there is a formal communication or dividend payment.”

Source: Business Lexington BY BRIAN POWERS


How Crowdfunding Has Changed the Startup GameSingularity HubCrowdfunding has become a multi-billion-dollar industry, funneling millions of dollars into thousands of projects. Technology in particular is one of the leading categories on popular fundraising platforms like Kickstarter an [...]

The GuardianCrowdfunding: the new buzzword for academics needing research moneyThe GuardianArchaeologist Dr David Petts, from Durham University, has also used crowdfunding, raising almost £25,000 to fund a project on Lindisfarne, off the Northumberland coast. The dig, in June, led to [...]

Airbitz, BitPay, and Wefunder leverage bitcoin and new US ...Brave New CoinEquity crowdfunding platform, Wefunder, recently started accepting bitcoin. On the same day, popular bitcoin mobile wallet provider Airbitz announced the ...Wefunder Launches 10 New Regulation Crowdfunding Offe [...]

CNNMoneyDorothy's fading red slippers saved by $300000 in crowdfundingCNNMoneyThe ruby red slippers worn by Judy Garland in the beloved 1939 film "The Wizard of Oz" are set to undergo a major conservation effort following a successful crowdfunding campaign. The Smithson [...]

Raise Money for Personal Bills on Crowdfunding SitesKiplinger Personal FinanceWhile crowdfunding is often associated with business start-ups, many people are finding it a fruitful way to raise money for personal needs. Sites such as YouCaring, GoGetFunding, GoFundMe and GiveForward ha [...]

Crowdfund InsiderReport: Title II Crowdfunding Data on Three Year Anniversary Tops $1.47 BillionCrowdfund InsiderFifty Dollars Money Grant Crowdnetic has published its annual Crowdwatch report on Title II investment crowdfunding as enacted under the JOBS Act of 2012. Title II, or Reg [...]

How The Fix Crowdfunding Act Continues To Help Improve The Success Rates Of Small BusinessesCBS LocalIn July of this year, Republican Patrick McHenry from North Carolina spearheaded two important bills. Both passed through the House in a landslide vote as part of The Fix Crowdfunding [...]

BloombergCouples Desperate For Children Turn to Crowdfunding FertilityBloombergCrowdfunding has become a popular mechanism for many couples who can't afford the high costs of IVF, or adoption and surrogacy. “It's not an easy thing to share publicly,” says Crystal Barrett, 33 [...]

City turns to crowd funding to help replace boardwalk over Flint RiverMLive.comFLUSHING, MI -- The city of Flushing has opened a crowdfunding campaign to replace a wooden boardwalk over the Flint River. The goal is to raise $50,000 in 60 days on Patronicity, a crowdfunding website, to [...]

AZCentral.comTiny companies lure investors under Arizona crowdfunding lawAZCentral.comInvestors who make bets under the state's one-year-old crowdfunding law certainly have the potential to get in on the ground floor, but they must be patient and might not receive any returns. Th [...]

CFB Finance

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |