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Raising Capital Via Crowdfunding: A Step Closer to Reality

By Ronald C. Berger


The JOBS Act (short for Jumpstart Our Business Startups Act) became law in April 2012. One of the more controversial provisions in the JOBS Act was the creation of a new “crowdfunding” exemption from federal and state securities-law registration available for startup and early stage businesses seeking to raise capital.

Crowdfunding is the name given to raising money via the Internet. Someone raising funds through crowdfunding typically seeks small amounts from a large number of individuals. Crowdfunding existed prior to the JOBS Act, but the funds typically came in the form of donations — either to support a cause or an artistic endeavor without any expectation of a financial return from the donation. Sometimes the contributor received a token gift for his or her contribution, such as a product sample.

In the United States, crowdfunding has not been used by businesses to raise capital from individual investors because of limitations imposed by federal and state securities laws. Offering someone an ownership interest in a company in exchange for an investment involves the sale of a “security,” and current law does not allow the solicitation of equity capital from the public-at-large via the Internet without going through the process of fully registering the offering with the U.S. Securities & Exchange Commission (SEC). The JOBS Act crowdfunding provisions set out to change that by allowing businesses to raise capital using Web-crowdfunding techniques. The goal was to facilitate the raising of capital by making relatively low-dollar offerings of securities less costly.

The crowdfunding exemption created by the JOBS Act allows companies to seek small investments from an unlimited number of investors, subject to certain conditions imposed by Congress. Those conditions include:

  1. The total amount raised during any 12-month period cannot exceed $1 million.
  2. An investor cannot invest more than the greater of $2,000 or 5 percent of the investor’s net worth or annual income, if the investor has a net worth or annual income of less than $100,000. If the investor has a net worth or annual income greater than $100,000, the investor may invest up to 10 percent of the investor’s net worth or annual income, up to a total investment of $100,000.
  3. The investment must be sold through a registered securities broker-dealer or a registered “funding portal.”
  4. The company may not advertise the offering other than the publication of a notice directing the public to the broker-dealer or funding portal managing the offering.
  5. The company must file with the SEC certain disclosure information about the company, its business, and its officers and directors.

The crowdfunding provisions of the JOBS Act are not self-implementing. Congress directed the SEC to adopt regulations implementing the crowdfunding exemption within 270 days of enactment of the JOBS Act. That deadline came and went, but on Oct. 23, 2013, the SEC issued a proposed “Regulation Crowdfunding.” The regulation is more than 50 pages long and is contained in a release totaling 585 pages. The proposed regulation expands on some of the requirements included in the JOBS Act and adds several new requirements not included in the JOBS Act pursuant to authority delegated by Congress to the SEC to promulgate regulations implementing the Act.

The public disclosure of business and financial information about a company selling securities is a fundamental component of the current regulatory scheme governing securities offerings, so it comes as no surprise that Congress and the SEC require the disclosure of specific information.

Within the JOBS Act itself, Congress required companies raising money through crowdfunding to disclose information such as the names and addresses of the company’s officers, directors, and 20 percent shareholders, and a description of the business or anticipated business of the company. The SEC, in its Regulation Crowdfunding, requires the following additional information be disclosed: (a) the business experience of officers and directors, (b) the compensation being paid to intermediaries for the offering, (c) the number of employees, (d) risk factors, (e) material indebtedness, and (f) related party transactions.

Congress also mandated in the JOBS Act that specific financial information be provided to potential investors. Companies raising less than $100,000 must disclose their most recent tax return and provide financial statements certified by the CEO. Businesses raising between $100,000 and $500,000 must provide financial statements reviewed by an outside CPA firm. Companies raising more than $500,000 must provide financial statements audited by an outside CPA firm.

In its Regulation Crowdfunding, the SEC added the requirement that companies must also provide a narrative discussion of its financial condition, including a narrative discussion of its historical financial results (if it has an operating history), liquidity, and capital resources. The SEC also specified that, for offerings in excess of $100,000, the financial statements must consist of a balance sheet, income statement, cash-flow statement, and statement of changes in owners’ equity for the past two years. In order to facilitate the disclosure of information required by the JOBS Act and its regulation, the SEC proposed a new Form C on which a company may supply the required information.

In its release announcing the proposed Regulation Crowdfunding, the SEC said it was mindful of the costs of complying with the crowdfunding requirements and sought to strike a balance between making crowdfunding affordable for small businesses and protecting the interests of investors. The SEC estimated that the upfront costs of complying with the crowdfunding requirements were between $13,500 and $18,500 for an offering of less than $100,000; between $40,500 and $70,500 for an offering of more than $100,000 but less than $500,000; and between $77,250 and $152,250 for an offering exceeding $500,000.

The bulk of these estimated costs are for compensation payable to the broker-dealer or funding portal managing the offering and for fees payable to CPAs for obtaining reviewed or audited financial statements as required for offerings in excess of $100,000.

The SEC invited public comments on its proposed Regulation Crowdfunding. In its release announcing the new Regulation Crowdfunding, the SEC identified about 300 specific issues on which it solicited comments. Public comments were due in early February. Until the SEC issues Regulation Crowdfunding in its final form and it becomes effective, companies may not utilize the crowdfunding exemption contained in the JOBS Act to raise capital.

Ronald C. Berger is a business and corporate attorney at Bond, Schoeneck & King, PLLC. Contact him at (315) 218-8216 or

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