Crowdfunding: Who Will (and Who Won't) Be Doing It

Among the features of the recently enacted JOBS Act that has attracted the most attention are the legislation's provisions for "crowdfunding." Under these provisions, a company is permitted to raise up to $1 million during any 12-month period through an SEC-registered crowdfunding portal. While these provisions have attracted a great deal of discussion and even controversy, a more basic question is - who will actually be taking advantage of this new fundraising procedure?

A common assumption about the new crowdfunding procedure is that it will be most beneficial to start-up companies. But at least according to a May 9, 2012 CFO.com article (here), due to the procedural burdens and costs associated with the JOBS Act's crowdfunding provisions, crowdfunding is unlikely to be an attractive alternative for start-up companies.

According to the article, the crowdfunding provisions in the JOBS Act may be "too complex and onerous" and "not very cost-effective"  for an early-stage company. Among other things, entrepreneurs launching a new venture "may lack the financial acumen and robust business plans they'll need to comply with the JOBS Act" and they also "may not have the cash to hire the accountants and lawyers they will need to navigate the law." 

Instead, the companies likeliest to be using crowdfunding will be "more mature firms" that "have the experience of searching for sources of capital" and that are "able to show, based on financial information, performance metrics and forecasts, that they are heading in the right direction."  Among other things, the crowdfunding process will require a certain amount of rigor, if for no other reason than the company using the process will have to provide financial statements.

The financial statement requirements will impose a cost-benefit analysis on companies considering a crowdfunding financing, due to the Act's sliding scale requirements. Companies raising up to $100,000 need provide only a financial statement signed by the company's directors. But companies raising between $100,000 and $500,000 must provide financials reviewed by a CPA. And for companies raising between $500,000 and $1 million, audited financials must be provided. Companies will have to decide whether their financing requirements justify the expense of having their financials reviewed or audited. In addition, the Internet platforms through the crowdfunding offerings will be conducted will also be charging fees, which will add to the cost.

As I have previously noted (refer here), the JOBS Act's crowdfunding features also expressly include liability provisions. The potential liability exposures mean that issuers trying to raise money through a crowdfunding offering "will probably need to get a lawyer involved," which, as a commentator quote in the article notes, is "not ever cheap."

There is also the possibility that the SEC will add even greater burdens and expense when it releases its crowdfunding rules in January 2013. Among other things, the SEC could add additional burdens in the way that it regulates the funding portals. The SEC has also no secret of its concerns about the possibility of scam artists using crowdfunding to try to con investors, as a result of which, as a commentator quote in the article notes, the SEC might "layer on more regulation." For example, the SEC might require disclosure after the crowdfunding offering, which "could make crowdfunding potentially cost prohibitive."

The Venue That Suits You Best: Where is the best place in the world to file a lawsuit? Well that depends on the kind of lawsuit you want to file. Want to sue for libel? Then you want to file in the U.K. Thinking of suing for patent infringement? Then you should file in Germany. All of this is according to the "best and worst places to sue" atlas published on May 10, 2012 in BusinessWeek, and which can be found here.

More Thoughts on Asia: As I discussed in a blog post summing up my observations of my recent Asia trip, there is an incredible amount going on now in Asia. The present and future business opportunities in Asia are enormous - so much so that I really regretted during my trip that my children were not there to see what I was seeing.

It is in this context that I note an article that appeared on May 11, 2012 Wall Street Journal. The article, entitled "P&G Unit Bids Goodbye to Cincinnati, Hello to Asia" (here), describes how Proctor & Gamble is moving its cosmetics and personal-care unit from Cincinnati to Singapore. The company is making the move based on its "decision to base the business in the fast-growing Asia beauty market," as part of a larger plan to move employees and manufacturing facilities closer to its key customer bases. The article goes on to note that the Asia-Pacific region already accounts for half of the world's market for skin care, and is also by far the fastest growing region.

The article includes a sidebar identifying a number of similar moves developed-world companies have made recently. For example, GE has moved its X-ray unit from Wisconsin to Beijing; Halliburton has set up a separate headquarters in Dubai; DSM Engineering Plastics has moved its headquarters from the Netherlands to Singapore: and Rolls-Royce has moved its global marine headquarters to Singapore from London. (As I understand it, AON's recent decision to move its headquarters from Chicago to London is in part explainable as part of this same phenomenon, because so much of its business and growth is outside the U.S.)

Maybe I am giving too much significance to these developments I am overly focused on Asia so soon after my return home from Asia.  Even allowing for that possibility, these companies' moves still seem significant. These companies are re-orienting themselves because the world is re-orienting.   It seems pretty clear to me that the path to future business success is going to run through Asia. Those of us doing business in the U.S. and in Europe now need to prepare for the fact that our clients, or at least those who are likeliest to succeed, are going to be positioning themselves to participate in Asian opportunities. Provides of services will need to be prepared to adjust as the companies reposition.

China in Ten Words: Another observation from my Asia trip is how vast, complex and enigmatic China is. Since returning home, I have read several books about China and its history, trying to get a better sense of the country and the changes it has been through in recent years. The country is so large and the changes it has been through have been so momentous that it seems nearly impossible to briefly summarize it all. For that reason, the slim, readable book China in Ten Words by Yu Hua, a Chinese author who lives in Beijing, is so interesting and impressive.

Yu's book is divided into ten short chapters, each of which has a single word as a theme. The ten chapters are: people; leaders; reading; writing; Lu Xun (a pre-revolutionary Chinese author); revolution; disparity; grassroots; copycat; and bamboozle. Yu took this thematic approach because, as he says, if he tried to capture everything about China, the result would be a book so long that no one could ever read it. By limiting himself to just ten words, he gives us "ten pairs of eyes" to scan the contemporary Chinese scene.

Yu's method has a very specific purpose, which he explains in his introduction:

"The arrow hits the target, leaving the string," Dante wrote, and by inverting cause and effect he impresses on us how quickly change can happen. In China's breathtaking changes during the past thirty years we likewise find a pattern of development where the relationship between cause and effect is turned in its head. Practically every day we find ourselves surrounded by consequences, but seldom do we trace those outcomes back to their roots. The result is that conflicts and problems -which have sprouted everywhere like weeds during these past decades - are concealed amid the complacency generated by our rapid economic advances. My task here is to reverse normal procedure; to start from the effects that seem so glorious and search for their causes, whatever discomfort that may entail.

In tracing the current outcomes back to their roots, Yu tells the story of contemporary China from the perspective of his own personal experiences. What quickly becomes apparent is not only how much Yu has seen and experienced in his life, but how much everyone in China older than, say, forty or so, has seen and experienced. The dramatic and appalling details of the scenes he witnessed during the Great Leap Forward and the Cultural Revolution, which took place during his childhood and adolescence, provide an almost incredible backdrop to China's current prosperity and economic growth.  As Yu says, "in this quest to follow things back to their source, we cannot help but stumble on one misfortune after another."

The unexpected and interesting message that emerges from Yu's account is the directness of the connection between the events during the Great Leap Forward and the Cultural Revolution and contemporary circumstances. Yu finds parallels between the excesses of those earlier eras and many of the excesses of modern China. In his chapter titled "Revolution," he shows how the propaganda deceptions of the Great Leap Forward era and the revolutionary violence of the Cultural Revolution era continue to shape behavior and events.

The consequences for China emerge Yu's book progresses; his final four chapters - disparity, grassroots, copycat and bamboozle - portray a country beset with "moral bankruptcy and confusion of right and wrong." For example, in discussing the "copycat" phenomenon - whereby, as a result of an engrained revolutionary era ethos, counterfeiting and infringement are accepted as part of the "anarchist spirit" - Yu characterizes the trend as "a sign of something awry in China's social tissue."

In the same vein, in the book's final chapter, Yu explains how the word "bamboozle" has come to gain such broad acceptance in modern China, as its particular usage "throws a cloak of respectability over deception and manufactured rumor." Yu describes a society where the people routinely bamboozle the government and the government routinely bamboozles the people  Yu recounts several different tales illustrating this process in action, and then comments that "there is really no end to these stories of fraud and chicanery, for 'bamboozle' has already insinuated itself into every aspect of our lives."

Yu concludes that "the rapid rise in popularity of the word 'bamboozle,' like that of 'copycat,' demonstrates to me a breakdown of social morality and a confusion in the value system in China today," which he says is "an aftereffect of our uneven development these past thirty years." Yu ends his book with a personal anecdote showing how the attempt to bamboozle can backfire. (Yu recounts how as a child he faked a stomachache to get out of doing chores and wound up getting his appendix removed.) Yu doesn't expressly connect the link between his personal experiences and China, but the implicit message seems to be that China could wind up as the victim of its own bamboozlement.

Yu writes simply and clearly, and his many anecdotes humorously illustrate his themes. Using ten words, Yu manages to provide an interesting and though-provoking picture of contemporary China. In the portrait he paints, China is a troubled giant still struggling to recover from the painful events of the country's early history.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

For more information about LexisNexis products and solutions connect with us through our corporate site.