Rules to Raise Capital
and whether there is a way to raise
capital online via crowdfunding. Below is
a summary of the current state of equity
crowdfunding, its limitations and other
potential options.
many contexts and has many meanings
depending on the source. For example,
many companies have raised money
through crowdfunding sites like
Kickstarter and Indiegogo. This type
as "cash for love" and the contributor
typically receives something tangible
in return for the donation. In 2015,
watchmaker Pebble raised $20.3 million
from 78,471 backers for its new smart
watch and in 2014 the Coolest Cooler
raised a total of $13.2 million from
62,642 backers for its high tech cooler.
No equity or securities are issued to
backers in this type of crowdfunding and
such campaigns are generally not subject
to federal and state securities laws.
However, companies that raise money
online from investors in exchange for
equity, securities or debt are subject
to federal and state securities laws.
Historically these laws have prohibited
the type of activities that constitute
equity crowdfunding.
crowdfunding law permitting
equity crowdfunding?
passed the CROWDFUND Act back
in April 2012 as part of the Jumpstart
our Business Startups (JOBS) Act.
up companies to raise capital in small
amounts from numerous investors
through an online platform.
The Act wasn't effective immediately
and directed the Securities and
Exchange Commission (SEC) to adopt
regulations implementing the Act
within 270 days. Finally, in October
2015 more than three years after
Congress passed the Act the SEC
adopted Regulation CF implementing the
crowdfunding rules.
equity crowdfunding?
crowdfunding is that it allows companies
to raise capital from investors who are
not "accredited" as defined by Rule 506
of Regulation D.
have been limited to raising capital from
investors who had sufficient net worth or
income to meet the accredited investor
definition. This significantly lowers the
number of potential investors. Under
the new equity crowdfunding rules, any
individual may invest subject to certain
limitations on the total amount invested
by such investor in all crowdfunding
investments.
publish and distribute notices containing
basic information regarding the issuer
and the offering across multiple online
platforms. Although the company
cannot engage in traditional advertising
strategies to reach investors, the new
rules provide a method to reach a large
number of potential investors online.
equity crowdfunding?
disadvantages. First "blank check"
companies formed for unspecified
purposes or to purchase another company
cannot utilize the new crowdfunding
exemption. In particular, this will
prevent many real estate funds from
using crowdfunding. Second, the total
amount sold to investors in any 12 month
period cannot exceed $1 million. This
small maximum offering amount will
be insufficient for many offerings other
as an outside general counsel, he provides
practical solutions to legal issues by working
with company management to understand
and implement their business strategy. He
regularly assists companies in connection with
the structuring and documentation of private
securities offerings.
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