Thursday, October 24, 2013

What Could Be More Fun Than A 585-Page Release on Proposed Crowdfunding Rules?

After about 18 months of eager anticipation, the SEC just published its proposed rules regarding Crowdfunding under the Title III of the JOBS Act. The release is 585 pages long so I’d suggest it may be an ideal time to buy stock in companies that supply paper to law firms across the country!
Unlike the recent changes under Rule 506 detailed in this prior post, which permit raising capital from accredited investors only using general solicitation (if you jump through all the right hoops to verify accredited status), the Crowdfunding rules, once finalized, will permit the raising of small sums of money from a large number of investors (whether accredited or not).
Unless you’ve been living in a cave, you know that companies have been crowdsourcing capital (on sites like Kickstarter and indiegogo ) for a while. Of course, this capital hasn’t come with any equity strings attached (maybe just a T-shirt or beta test promise). Title III of the JOBS Act is supposed to change all of this by permitting up to $1 million in equity capital to be raised in any twelve-month period from all types of investors.
Since these are only proposed rules (it took almost a year to get from proposed rules to final rules on the Rule 506 general solicitation), I haven’t yet dropped everything else on my desk to pour through all the details. A couple of key things to know that haven’t changed since I wrote about the crowdfunding provisions of Title III back when the JOBS Act was originally passed:
·         These are still just proposed rules. You still cannot conduct a crowdfunded securities offering (general solicitation with unaccredited investors) until the final rules are adopted (likely a minimum of months from now). You don’t want to end up like the buy a beer company guys.

·         There are still many requirements in the proposed rules that could limit the usefulness of crowdfunding for most companies. These include certain financial disclosures (depending on the amount of total capital being raised), other mandatory disclosures, the use of a broker or "funding portal,"  along with some ongoing reporting obligations to the SEC. The bottom line may be what I said in my original post:  “You won’t be able to do it without the assistance of a skilled securities lawyer (and, depending on the amount you’re raising, an independent CPA).”

·         There’s still quite a bit unresolved about crowdfunded equity offerings. For example, state securities commissioners (like Ohio) appear openly hostile to equity crowdfunding.
As with every JOBS Act post, stay tuned for updates as the final Title III Crowdfunding rules develop.


  1. We still have big hopes in this newly forming industry.

    Totally agree with first bullet point. Don't do it. Yet.

    As entrepreneur, I do not see any issue in using CPA or a lawyer to get funded. I think, the comparison should be made with Angel and VC capital and not KickStarter/Indiegogo as this is equity in exchange of capital.

    On your last bullet point (Ohio Securities Commission) I think, the federal ruling (SEC) will overwrite the state's one. Or, at least, the state need to align their policies/rules/views with those at the federal level.

    Thank you for your blog.

  2. Thanks for the comment. What I've been suggesting all along is that conventional raising of capital from angels (in a Rule 506 offering) appears as though it will be less burdensome/costly than the Crowdfunding regulation. If you want to raise $50k from a bunch of small investors, you may spend half that amount raising the capital.

    We already know that the states (NASAA) do not like the JOBS Act. I've heard one regulator refer to the legislation as "apocalyptic." It's true that Crowdfunded equity securities will be "federal covered securities" and exempt from registration at the State level (other than possible filings required), but that doesn't mean that state regulators won't (or shouldn't) step up enforcement activities against bad actors.