Why Crowdfunding Changes Have Not Changed the World – Yet

The rules allowing general solicitations for investments went into effect this week doing away with an 80-year-old restriction preventing companies not publicly traded on stock exchanges from advertising.  Although a step in the right direction, the new JOBS Act crowdfunding rules are not the free for all you may have read about in the press.
Everything Old Is New Again
Houston companies have been crowdfunding for some time now.  They have just been doing it legally under the old rules.  Virtuix went to Kickstarter to raise $150,000 for its virtual reality video game consul.  It met its goal in three hours and raised more than $1 million.  On sites like Kickstarter, Indie Go Go and Rockethub, you can raise money in exchange for rewards or prizes.  You can’t ask for equity.  That has always been the rule.  Local microbrewery Buffalo Bayou Brewing Company legally raised funds from about 50 investors under existing SEC regulations without, (Gasp!) a website platform.  Buffalo Bayou Brewing Company could not advertise its offering, but could seek out investors the old-fashioned way – by shaking hands with the right interested people.
But, now it’s different
The new rules allow entrepreneurs to generally solicit – meaning advertise on the internet.  Your Facebook feed may not be full of great new investment opportunities because there are limits.  For now, although you can generally solicit, you can only take money from accredited investors.  Generally speaking those are individuals with over $200,000 in income over the last two years ($300,000 for joint filers) or a $1 million net worth excluding their residence.  Essentially, you can receive money from rich people and not that network of 750 of your old high school friends on Facebook.
If you go this route, you have to take steps to make sure all of your investors are accredited.  Under the old regime, you simply made the investor check a box confirming he or she was an accredited investor.  Now, you need some type of evidence.   You also have to file a Form D with the SEC within 15 days of your first sale.   There are allegedly more than 8 million people that would qualify as accredited investors in the United States.  Only 3% invest in private companies according to this Forbes article. It remains to be seen if entrepreneurs will try to use websites to tap this market or whether it will be too burdensome.
Then, there is the future
Most people are excited about Title 3 of the JOBS Act which would allow for general solicitations of all investors regardless of whether they are accredited meaning you can hit up and take money from all of your high school friends.  Many mistakenly believe it is now legal as of this week.  Let’s be clear – IT IS NOT.
The SEC has yet to set rules that will apply to general solicitations to all investors.  They allow accredited investors to fend for themselves more than the small time investors because the SEC is balancing opening up the private equity market to the masses and preventing mass fraud.  We do know Congress has set the minimum baseline of rules to which the SEC may add which include:
  • You must use government-registered portals or websites
  • You can only invest the greater of $2,000 or 5% of net worth if you earn less than $100,000 and $10,000 or 10% if you earn more than $100,000.
  • Companies will have to provide documentation including financials.  The financials will have to be audited if you seek more than $500,000.
  • Companies can only raise $1 million in any 12-month period.
For a more detailed summary of the current rules and the proposals for Article III, read this.  If you want to read what some naysayers have to say about crowdfunding equity, read this.
Securities regulations are complicated, and hopefully this goes without saying, just because you saw something on the Internet that says you can start asking for money on Facebook doesn’t make it so.  The SEC is charged with balancing the interests of democratizing the equity markets and protecting investors.  With those two competing factors at play, any changes will likely be incremental at first to see how the market reacts.  So far, not a whole lot has changed.  There is just a new regulated method of getting your business opportunity into the hands of the few people with money looking to invest.  You used to go to networking events to do that.  Now, crowdfunding has just come into the internet age.