crowdfunding

SEC finds U.S. Crowd-Funding Offers New Capital Source

By Roslyn Akel, J.D. Candidate 2019 | Posted on

Crowdfunding has become an increasingly popular form of raising capital for small businesses and entrepreneurs.

Social Media platforms have come to play a large role in facilitating crowd funding. They also, as a platform for crowd funding, have enabled regulators to foster fair valuations in determining the value of enterprises whose shares are offered for sale.

In May 2016, the U.S. Securities and Exchange Commission (“SEC”) issued a new rule, Reg CF, to regulate crowd funding. The Jumpstart Our Business Startups (JOBS) Act, passed into law in 2012, empowered the SEC to write new rules to create a regulatory regime for crowdfunding.

These new regulations allow crowdfunding, up to $1 million, from accredited and non-accredited investors alike. Reg CF is essentially the first step in the capital ladder for early-stage companies. The intent was to create a low barrier to capital formation in order to enable businesses at their earliest stages to attain sufficient capital to get off the ground.

However, the new regulations, despite their intent to lower the barriers of capital formation, have been criticized by some as overly strict, costly, and ultimately creating barriers to capital formation. Many critics believe that the new regulations may actually be a deterrent to crowdfunding.

Mike Piwowar, acting SEC Chairman, echoed concerns that the rules were too restrictive. Piwowar stated, “[t]he commission should consider whether any further steps should be taken to improve our crowdfunding regulations, including the use of exemptive authority.”

Likewise, the Division of Economic and Risk Analysis (“DERA”), published a report that provided updates on the current state of issuers utilizing these new regulations as well as some critiques for changes to be made in the future. The DERA report affirmed the sentiment that the industry is quickly evolving and that today’s activity is probably not wholly indicative of future outcomes.

Looking forward, this is just the start for regulating crowdfunding. Changes are undoubtedly on the horizon. Congress is in the process of updating Reg CF to reflect some of the issues within the industry. Specifically, there are hopes that this update will allow special purpose vehicles which, in turn, would more easily align the interests of issuers and borrowers as well as more easily manage shareholder interests.

Despite the plethora of critiques, these new regulations are still a step in the right direction. They regulate crowd funding in a manner that will strike a balance to meet the needs of issuers, borrowers, and business in ultimately driving the success of newly formed businesses.

SEC finds U.S. Crowd-Funding Offers New Capital Source (PDF)

S.E.C. Adopts JOBS Act Title III to Allow Equity Crowdfunding

By Joyce Li, J.D. Candidate 2018 | Posted on

As of October 30, the S.E.C. has adopted new crowdfunding rules that will allow small investors to purchase equity shares in startup companies. Under Title III of President Obama’s JOBS Act (Jump-Start Our Business Start-Ups), the revisions seek to improve upon an earlier draft that was widely rejected for requiring unworkable compliance costs and procedures.

The new Title III rules cap companies at $1M per year, and limit individual investor contributions based on annual income and net worth. Those with an annual income or net worth of less than $100K are restricted to investing between 5% of such or $2K, while those with greater than $100K, are limited to investing 10% of such. Each company is also required to disclose financial statements that must be independently audited, unless they are seeking less than $500K or are equity crowdfunding for the first time. Further, each funding portal must register with the S.E.C. and be subject to regulation.

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SEC Proposes Rules for Crowdfunding Intermediaries

By Davis Polk and Wardwell LLP | Posted on

As described in our Client Newsflash entitled “SEC Proposes Crowdfunding Rules under JOBS Act,” the Securities and Exchange Commission (“SEC”) recently proposed rules under the JOBS Act (the “Proposed SEC Rules”) that would permit certain private issuers to raise investment capital through “crowdfunding”—a process of enabling a large number of investors to each make relatively small investments in an issuer via the Internet.

Click here to read the entire story.

Crowdfunding: A Dream or Reality?

By Gilad Yacubovich, LL.M. Candidate 2014 | Posted on

Last Wednesday, the Securities and Exchange Commission released new rules for crowdfunding under the 2012 Jumpstart Our Business Startups (JOBS) Act. Crowdfunding gives startups a way to raise capital through the Internet and thereby reach a large, diverse set of investors.

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SEC Proposes Rules on Crowdfunding

By Terry D. Nelson and Garrett F. Bishop, Foley and Lardner LLP | Posted on

On October 23, 2013, the Securities and Exchange Commission (SEC) proposed rules which would, if adopted, govern the offer and sale of securities under new Section 4(a)(6) (the “Crowdfunding Exemption”) of the Securities Act of 1933 (Securities Act), provide a framework for the regulation of registered funding portals and brokers, and exempt securities sold pursuant to the Crowdfunding Exemption from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act).

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Funding Portals Required to Register with the SEC

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

The SEC is beginning to consider future, customized regulation of funding portals pursuant to the JOBS Act.  Some commentators suggest that work on regulating funding portals “may illuminate potential ‘customized’ registration regimes for other firms and individuals that function in a limited broker-dealer capacity,” for example finders.  As a result, funding portals are required to register with the SEC and the FIRA, but will be subject to a simplified registration regime.  (more…)

FTO Analysis Necessary for Crowdfunding

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Financing through crowdfunding is an attractive way for startups and small businesses to raise capital by receiving small amounts from a large number of investors.  The method will only increase in popularity after the SEC finalizes the provisions for equity-based crowdfunding.  There are, however, potential IP problems inherent in crowdfunding.  In order to attract investors, companies have to publicly disclose detailed information about their business.  Competitors can then use this information to find IP violations and sue the budding business.  In order to prevent or prepare for this situation, companies using crowdfunding should conduct a thorough freedom to operate (FTO) analysis. (more…)

JOBS Act Symposium: Liveblog Recap & Review

By Valerie Jon Ramos, J.D. Candidate 2015 | Posted on

This post will detail the two panels from last Friday’s 2013 BCLBE and BBLJ JOBS Act Symposium:  1)  The IPO On-Ramp and 2) Crowdfunding.

Panel 1:        The IPO On-Ramp

Moderator:  Ian Peck

Robert Bartlett, Professor, UC Berkeley, School of Law

Reza Dibadj, Visiting Professor, UC Berkeley, School of Law

Martin Zwilling, Startup Professionals 

Background: Title I of the JOBS Act

Title I of the JOBS Act was originally pitched as a job creation vehicle.  Title I seeks to accomplishes this through its two provisions: (1) providing an “on-ramp” to going public for emerging growth companies (“EGCs”), a company within five years of going public, using existing principles of scaled down regulation; and (2) improving the availability and flow of information for investors before and after an IPO.

There are four­ major changes that were discussed during the panel:

1)    Creation of the “Emerging Growth Company” as a new category of issuer

2)    EGCs eligible for IPO On-Ramp enjoy significant benefits, including:

  • A reduced two-year requirement of audited financials needed in registration statements versus the standard three to five years
  • Allows communication between EGCs and qualified institutional buyers prior to filing registration statement (although there is an SEC Rule that does not allow solicitation of filing)
  • Research reports can be filed even while the EGC is making an offer

3)    EGCs have less extensive financial reporting/audit obligations (exempt from SOX)

4)    EGCs have limited executive compensation disclosures 

Moderated Q&A

When questioned about what problems exist in the IPO market and how the JOBS Act approached these problems, there was a general consensus that the worry stemmed from the dramatic decline in IPOs in the market over the past decade. IPOs going overseas, problems that came with the economic downturn, and the choice of M&A as the preferred exit strategy.  Zwilling spoke beyond the general market on how entrepreneurs, in general, want control of their company, and when they are ready to exit, M&A serves as a better exit strategy due to its lower costs and fewer regulations.

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JOBS Act Symposium: Crowdfunding–Finance Democratization or Investor Protection?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The crowdfunding panelists discussed what Mary Dent referred to as a “fundamental tension” between the democratization of finance and protecting unsophisticated investors.  In traditional securities law, S.E.C. has protected Main Street consumers from especially risky investments, unless an investor can demonstrate they he or she is a sophisticated investor—using net worth, for example, as a proxy for sophistication.

Professor Bartlett agreed with the tension and added that they crowdfunding marketplace may suffer from the “bad apple” problem.  Even if a vast majority of crowdfunding investors or entrepreneurs have good intentions, a small number of ‘bad actors’ could easily shake confidence in the crowdfunding brand or marketplace. 

JOBS Act Symposium: Do the crowdfunding provisions make bigger problems than the ones they try to solve?

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Symposium’s second panel discussed the JOB Act’s crowdfunding exception.  Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks.

Eric Brooks sees investors defrauded everyday in his job with the SEC. As a result, the cynic in him says that the crowdfunding provisions do create greater problems than the solve. Fraud is even easier to perpetrate over the internet and the Act sanctions the funding portals. The SEC will likely face an increase in customer complaints from investors who lose money through crowdfunding investments which then have to be researched. Nevertheless, the Act and attendant regulations can work well if protections are preserved.

Robert Bartlett analogized crowdfunding to the ability to generally solicit investments up to a million dollars in the 90’s. That freedom led to significant instances of fraud. There is a definite potential for this act to be a repeat of those failures.

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