Crowdfunding: Not Ready for Prime Time

Alan N. Walter –

64Px - 011CrowdfundingWhat Crowdfunding Is:

Crowdfunding is the raising of capital or money by a company by the selling of small amounts of itself to lots of investors.

The JOBS Act:

Crowdfunding advocates were encouraged by the enactment of the Jumpstart Our Business Startups Act (the JOBS Act), in 2012. The alleged purpose of the JOBS Act was to
revigorate the US economy by encouraging the investment of capital in US companies. The Act accomplishes – or will accomplish – several things:

    • increasing the number of shareholders a company can have before needing to register with the Securities and Exchange Commission (SEC)
    • providing new exemptions from having to register a security offering with the SEC, including a new exemption for crowdfunding
    • reducing the required amounts of disclosures and regulations for certain
    • removing the general ban on advertising and general solicitation with respect to certain private placement of securities

What Crowdfunding Isn’t:

It isn’t simply an offering that is exempt from limits on advertising and general solicitation.

So What Crowdfunding is Allowed?

Good question. One that cannot fully be answered, since the overworked and underfunded SEC has yet to propose regulations to implement the crowdfunding provisions of the JOBS Act. But we do know what the Act provides. It would allow the use of online crowdfunding portals, which would need to be registered with the SEC. There would be limit on the amount each investing person could put into crowdfunding, depending on the person’s net worth and annual income.

And When Can I Start Crowdfunding?

Hopefully, sometime in the not so distant future. The new chair of the SEC, Mary Jo White has suggested that the rules would be proposed in the fall of 2013. Until those rules are proposed and adopted, crowdfunding will have to wait.

In the Meantime:

While we’re waiting for the crowdfunding rules, there are still ways for new companies to raise money:

  • Talk to your friends and family
  • Do an exempt private offering under Reg D. The JOBS Act simplifies these offerings and rules have been adopted to allow the simplifies offering
  • Raise money via Kickstarter and similar sites. These are real alternatives, provided your “investors” don’t expect to share in your success, but will be satisfied with t-shirts and other rewards
  • Offer securities registered with the SEC
  • Borrow
  • Find an incubator program for money and support
  • Work with a venture capital company

As usual, I’m here to help. Let me know if you have any questions or comments.

– Alan N. Walter