The Crowdfunding Wait Continues . . .
And the wait continues. . . . In April of 2012, Congress passed and President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act). This legislation promised to create jobs and grow the economy by improving access to the public capital markets for emerging growth companies. It also claimed to encourage entrepreneurship by reducing regulatory burdens. Title III of the of the JOBS Act, captioned as the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (CROWDFUND Act), was to authorize investment crowdfunding, which due to existing securities laws restrictions is not yet illegal in the United States.
Investment crowdfunding is different from the patronage crowdfunding currently engaged in through many websites, because investment crowdfunding would provide equity in exchange for any investments instead of simply offering products or gifts in exchange for donation funding. Examples of these websites are Kickstarter (www.kickstarter.com) and Indiegogo (www.indiegogo.com).
The CROWDFUND Act excited many entrepreneurs, because they believed when it became law it would allow entrepreneurs to use investment crowdfunding to raise capital, without fear of violating the securities laws, with a more direct and less regulated access to a wider pool of prospective investors. Unfortunately, that immediate excitement turned to skepticism, as experts began to unpack the onerous regulations. As mandated by Congress, the U.S. Securities and Exchange Commission (SEC) had 180 days to promulgate regulations to implement investment crowdfunding. It took the SEC until October 2013 merely to propose the investment crowdfunding regulations. Many reviewers of the proposed regulations have found them overly burdensome or impractical. And the wait continues. Final regulations still have not been issued by the SEC. No prediction can be made as to when this may eventually occur, or as to how they may be used to structure an investment crowdfunding strategy.
Until the SEC finalizes its regulations, current law remains in effect, and investment crowdfunding still is not permitted under the US securities laws. Many believe the SEC simply does not want to adopt an investment crowdfunding, over fears that crowdfunding will simply make small and potentially naïve investors easy prey to fraud.
Over the next series of blog posts, we will discuss the pros and cons of investment crowdfunding and some alternative fundraising strategies. As we continue to wait for the SEC to issue final regulations for investment crowdfunding, Krause Law can advise you on other financing strategies that are currently available.
(Blog Post authored by Prof. Malika S. Simmons, Of Counsel to Krause Law LLC)