Is there Wisdom in Crowdfunding?

Crowdfunding seems to be getting quite a bit of buzz these days.  Crowdfunding means raising a little bit of cash from a whole lot of investors.  It has a certain democratic air to it - it's not nearly as stuffy as a boring old private placement to a limited number of sophisticated and/or accredited investors.

There's only one problem with crowdfunding - it's virtually impossible to do legally (and cost-effectively) under the current securities laws of the United States!  That's because an offering of securities to a crowd is, almost by definition, a public offering which is heavily regulated by the SEC and state securities commissioners.  

But all that may be about to change.  Under the recently adopted JOBS Act, Congress has carved out an exemption from certain aspects of the federal securities laws for issuers engaged in crowdfunding.  The bad news is, the crowdfunding exemption doesn't become effective until the SEC adopts rules implementing the crowdfunding concept.

Once adopted, the crowdfunding rules will permit companies to issue up to $1,000,000 of securities through crowdfunding during any 12-month period.  Investments by any particular investor in a crowdfunding offering are limited to:

• the greater of $2,000 or 5% of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or
• 10% of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.

Crowdfunding will have to take place through a registered broker-dealer or an SEC-authorized funding portal.

The Texas State Securities Board has released a very informative letter on the "POTENTIAL HAZARDS OF RUSHING INTO 'CROWDFUNDING'" which is available here.