Crowdfunding 101: What Is It? And Should I Be Excited About it? PART 1

Posted by on Jul 26, 2013 in Crowdfunding and Fund Raising

Ever since the passage of the JOBS Act (the Jumpstart Our Business Startups Act), there’s been a lot of hype about crowdfunding. A lot of startups have built their entire business model on the assumed ability to use crowdfunding methods to raise capital. But, what is crowdfunding? And, is it really something that you should be excited about right now?

When used in connection with the JOBS Act, the term “crowdfunding” refers to an exemption intended to permit US companies to raise up to $1 million per year from the general public without the same restrictions as would normally be applied in a traditional private offering (or private placement) governed by Regulation D of the Securities Act of 1933. Crowdfunding as contemplated by the JOBS Act would permit a company to sell small amounts of equity to a much larger pool of investors than is currently permitted.

What’s So Great About Crowdfunding Anyway?

Non-Accredited Investor Potential: While traditional private placements may only be offered to institutional investors (such as banks or pension funds) or to a limited number of individuals who are qualify as “accredited investors” (i.e. those having a net worth greater than $1 million or an annual income exceeding $200k (or $300k if combined with that of a spouse)), crowdfunding would permit the issuing company to raise money from a greater number of non-accredited investors who are typically not eligible to participate in a private placement.

Accessible Funding Portals: Companies who wish to raise capital through crowdfunding methods will eventually use platforms that are publicly accessible websites.  This enables companies to issue equity shares over the Internet to registered investors who will make their investments through the online funding portal without the companies having to have engaged in the often difficult and costly process of forming a pre-existing relationship with the investors.

Should You Be Excited About Crowdfunding?

The answer to this is both yes and no. Yes, you should be excited about the ways your company could potentially benefit from this new(er) fundraising method. But, no, you should not be too excited about crowdfunding just yet. Here’s why:

Title III of the JOBS Act, which is home to the crowdfunding exemption to the traditional Regulation D private placement rules, has not been fully implemented yet because the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have not yet adopted the final rules which are needed to fully clarify and define the scope of the crowdfunding exemption.

Until the final rules under Title III are adopted by the SEC and FINRA, private offerings and sales of equity interests which are intended to rely on the crowdfunding exemption in Title III of the JOBS Act are unlawful.

Therefore, while there are some companies who are using hybrid methods or other alternative crowdfunding platforms to raise capital, it is probably not a good idea to get too excited just yet about your company’s ability to fully rely on the crowdfunding exemption to raise capital.

For further discussion on crowdfunding (including its anticipated disadvantages and alternatives) stay tuned for Crowdfunding 101: PART 2.