Sat, 9/14/13
Simon R. Inman, Partner

There has been a lot of buzz about crowdfunding recently.Sadly, despite the passage of the legislation in Congress nearly 12 months ago, we are not much closer to seeing the rules that the SEC must produce before crowdfunding can begin.Most commentators believe that we will not see crowdfunded transactions until sometime in 2014.

This bulletin is the first of a short series that is designed to explain the background to the crowdfunding legislative and regulatory framework, as well as the possible pros and cons of what many believe will be a Brave New World of funding for small businesses.

The basic regime for the protection of investors in the United States that was established by the Securities Act of 1933 was to provide that securities could not be sold to the public unless they had been registered with the SEC.The SEC’s job was to vet the securities to ensure that they were appropriate to be offered to the public.However, the legislation and SEC regulations created a number of exceptions to the general rule requiring registration. The most well known exception is probably that which relates to offerings to “accredited investors”, being persons who, according to the SEC definition, should be capable of making an informed investment decision and bearing the risk of a total loss of their investment.These exemptions pre-empt state laws.

The crowdfunding legislation created a new exception to the prohibition against general solicitation of investors if the soliciting of investors is conducted through an authorized “funding portal”.This is a website managed by an appropriately licensed party through which investors will be able to make investments. The legislation limits the amount that any one business can raise in a 12 month period to $1,000,000 and limits the amount that any individual investor can invest depending on their own income or net worth.This excemption also pre-empts state laws.

Based in part on the success of organizations like Kickstarter and Indigogo, there has been a tremendous amount of excitement and anticipation regarding the opportunities that crowdfunding will provide once the SEC rules become law.It is probably fair to say that the public comments posted on the SEC website fall into two categories:those who cannot wait for the SEC to complete its rulemaking and exhort the SEC not to ruin things by being too conservative; and those who think that this is bad legislation and encourage the SEC to concentrate on ensuring that the public is protected from a potential avalanche of fraudulent investment scams.

The title of the crowdfunding legislation is “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”.

We shall see if the SEC can strike a right balance between these concepts.

For more information contact Simon Inman at or at (707) 526-4200.

100 B Street, Suite 400
Santa Rosa, CA 95401

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