Funding Portals l Jobs Act
Title III of the JOBS Act provides that a Crowdfunded offering must be made through an Intermediary that is registered broker-dealer or a funding portal. Like broker-dealers, funding portals must be registered with the Financial Industry Regulatory Authority. Funding Portals are subject to expansive but manageable regulations. Compliance with these regulations requires the skill of an experienced compliance team. We assist funding portals in complying with the registration and operational requirements of the JOBS Act.
Recently the Securities and Exchange Commission (“SEC”) published its new rules for equity crowdfunding offerings, called “Regulation Crowdfunding,” or “Reg CF” for short. The rules have yet to be finalized, and the Commission is currently asking for public comment on the 585-page document. Ever since the JOBS Act was signed into law in April 2012, market participants and observers have anticipated the release of the new regulation.
Issuers and small business advocates hope equity crowdfunding will make access to capital easier for startups; state regulators and industry watchdogs fear it will open the floodgates tofraud.
There has, however, been general agreement on one thing: that equity crowdfunding will be very popular for both public companies and private companies in going public transactions.
Are they right? The rules and regulations governing Crowdfunding suggest that they may not be. In order to take advantage of crowdfunding, issuers will have a lot of hoops to jump through that may outweigh many of the benefits.
Requirements and the Costs of Crowdfunding
Companies deciding to launch a crowdfunding offering will necessarily be small, given that the maximum amount that can be raised is only $1 million every 12 months. To get the offering started, the issuer will be required to make extensive disclosures on the new Form C, which must be filed with the SEC. It will then have to keep the regulator and the public updated on the progress of the offering, and in some cases will need to file annual reports as well. These disclosures are required both of public companies and private companies in going public transactions.
Should the company wish to raise more than $500,000, it will be obliged to file audited financials. That’s a big step, and a considerable expense.
The SEC’s view is sanguine. It’s convinced that many issuers will be able to complete most of the necessary paperwork themselves, reducing the cost of hiring attorneys, independent accountants, and auditors. The reality is that unless a company is interested in raising less than $100,000, it will have to avail itself to securities attorneys, accountants and attorneys.
The costs don’t stop with independent accountants and/or auditors. The SEC has gone to the trouble of estimating these costs, and presents its numbers in a table. If the company intends to raise between $500,000 and $1 million, its expenses will be significant. On the high end of the scale, such issuers could expect to pay $112,500 to compensate its funding portal, $60 for Edgar codes, $20,000 for Form C disclosures and updates, and $28,700 for an audit. The total is $161,260.
Equity Crowdfunding Advantages
The issuer choosing a crowdfunding offering can accept funding from all investors, not just accredited investors. It need not solicit information from interested participants to make sure they qualify.
It can bring itself to the attention of the public by listing with a funding portal. The portal’s role is like that of a newspaper running classified ads. It will provide space—much more than allotted to classifieds, of course—to each of the companies it represents. In that space, it will post information about the company and the offering provided by the issuer. The SEC encourages portals to establish forums where participants can discuss the merits of an investment. That’s in some ways an attractive idea, but those forums will have to be monitored closely to ensure that discussion doesn’t lead to the kind of slanging matches typical of financial message boards. The need to administer the forums is likely to result in greater expense for issuers.
Nonetheless, by using funding portals, companies will, with luck, be able to bring themselves to the notice of a broad range of potential investors.
Equity Crowdfunding Disadvantages
The issuer could spend $160,000 or more to raise between $500,000 and $1 million. Companies choosing this route should remember that, as with all offerings, there’s no guarantee there will be interested buyers.
The disclosure regime is fairly rigorous. This is especially puzzling because the SEC acknowledges that most crowdfunding candidates will be very small companies inexperienced in capital raising. That alone suggests the issuers will lack the experience needed to comply with disclosure requirements without help.
Neither issuers nor funding portals will be permitted to use advertising or general solicitation. As described above, portals are middlemen only. Equity crowdfunding is untested. As the SEC points out, it isn’t yet clear whether it will prove to be an effective way for small companies to raise money. Neither is it clear whether it will prove to be profitable for potential funding portals.
The Takeaway of Crowdfunding
The advent of equity crowdfunding offerings has been eagerly anticipated for a year and a half. It is still not an option for small companies including in going public transactions. As market participants await the SEC’s final rule, interested issuers would do well to read the Commission’s proposed Regulation Crowdfunding, and to remember that there are more established ways to raise capital. and easier ways to obtain shareholders in going public transactions.
Regulation D provides attractive alternatives. Rule 506(c), for example, allows issuers to raise unlimited amounts and engage in general solicitation and advertising, though only accredited investors may participate. The disclosure regime is less rigorous and the rule can be used by any issuer including in going public transactions.
Despite all the hype, there’s no guarantee that crowdfunding will work as well for small companies seeking to raise capital or go public. Unlike charities and political campaigns, supporters expect no significant monetary reward for their interest.
This blog post about equity crowdfunding is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting SEC registration statements, Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144, SEC reporting requirements, 1933 Act registration statements on Form S-1, S-8 and 1934 Act registration statements on Form 10, OTC Pink Sheet listings, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or firstname.lastname@example.org. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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