Securities Law Blog

On May 16, 2016, Title III of the JOBS Act, otherwise known as Regulation Crowdfunding or Reg CF, became effective permitting companies to raise funds by selling securities online to “ordinary” people, not just accredited investors, for investment purposes.  However, during the first few months of the availability of this highly anticipated form of capital-raising, the response has been underwhelming.  Through August 8, 2016, more than 70 issuers had filed a Form C with the SEC, with a combined capital-raising goal of approximately $8.5 million, a far cry from the estimated $16 billion that was raised through crowdfunding activities worldwide in 2014.

Although crowdfunding, which is essentially raising capital via the Internet, has been around in its current form since at least 2008 through platforms such as Kickstarter, IndieGogo, and GoFundMe, prior to the enactment of Reg CF such capital raising from smaller investors was generally limited to rewards-based or donation-based activities.  These investors either made a donation to the crowdfunding campaign or received a “reward” such as the first edition of a product being produced or memorabilia from a movie or album that they helped fund.  Reg CF opened the door for these investors to instead receive equity, and hopefully stock appreciation and financial returns, in the company that they are supporting.  The desire was that Reg CF would open up access to startup investment opportunities for non-accredited investors, while also greatly expanding the channels for available capital to small businesses and startups.

To date, the desired results have not necessarily materialized.  Some have argued that the rules are too restrictive and the costs of compliance too high.  Pursuant to Reg CF, an issuer may raise up to $1 million during any 12 month period in a crowdfunded offering with investors limited to investing a certain dollar amount based on their income or net worth.  In addition, issuers must disclose certain historical financial information, which, depending on how much they are trying to raise, may be required to be audited by an accountant, and issuers are subject to other ongoing reporting obligations.  Critics of Reg CF point to these low thresholds and regulatory burdens as discouraging smaller companies and startups from seeking crowdfunding as a capital raising option.

Whether crowdfunding will ultimately be widely adopted remains to be seen.  There is hope for a stimulus on the legislative front.  H.R. 4855: Fix Crowdfunding Act was approved by the House of Representatives on July 5, 2016 and is currently before the Senate. This legislation would, among other things, increase the amount that could be raised pursuant to the crowdfunding exemption from $1 million to $5 million, as well as amend other provisions of Reg CF to limit the regulatory burdens and costs associated with crowdfunding, in the hopes of making crowdfunding a more attractive option to issuers.  Even if such legislation is approved, it is unclear whether the limited response from investors to date is because potential investors simply are unaware of investing opportunities or are taking time to see how crowdfunding evolves or if such smaller investors simply are disinterested in such opportunities.  Despite the relatively slow start, the adoption of the new crowdfunding rules represents an important opportunity for smaller companies and startups by providing a fundraising option for companies that may otherwise be unable to attract interest from traditional venture capitalists and angel investors.