Equity-Based Crowd Funding: Pro and Con
Congress is considering legislation by which the Securities and Exchange Commission would lift limits on private equity investments, letting companies sell equity interests to investors online (“crowd funding”). Today the Wall Street Journal published a debate on this topic (Should Equity-Based Crowd Funding Be Legal?).
Some of the arguments in favor:
- In an era of tight capital, small businesses need access to more? investors.
- The Internet can provide millions of potential investors to companies at little cost.
- Those potential investors, in turn, will have the potential for investment returns that previously were limited to a relatively few well-heeled angels.
Some of the arguments against:
- Many companies will not have audited financial statements, creating a risk? that companies will portray themselves more favorably than is justified.
- Managing lots of small, unsophisticated investors can create significant administrative overhead.
- If a company can’t attract traditional angel investors, then it probably is not a good equity investment for the crowd.
- I would be concerned for both naive entrepreneurs and naive investors if effectively-unrestricted crowd funding were allowed.
- However, if equity-based crowd funding were subject to reasonable limits on the amount invested and required certain disclosures by the company, I would feel more comfortable.
- Furthermore, legislation could provide incentives for companies to behave properly by providing a “safe harbor” against certain types of liability if such limits and disclosures were complied with and if certain provisions were included in stock purchase agreements.
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Update: On April 5, President Obama signed H.R. 3606, the Jumpstart Our Business Startups (JOBS) Act. Title III of that legislation is called the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” or the “CROWDFUND Act“.
The CROWDFUND Act permits equity-based crowd funding subject to certain restrictions. These include, for example, limits on the total amount raised and the amount raised from any single investor, and the offering must be conducted via a broker or a funding portal (an intermediary that exists specifically for the purposes of the CROWDFUND Act). Furthermore, the issuer must make financial and other disclosures.
The Securities and Exchange Commission is seeking public comments as it develops regulations to implement the JOBS Act.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
3/26/2012 | 7:59 pm Permalink
I have a start up Company in Chicago and Im looking for information on equity based crowdfunding in order to get my company up and going.
4/12/2012 | 2:13 pm Permalink
Please see the Update portion of this post.