It's hard to raise capital. The regulatory restrictions
imposed by securities laws make it harder to do so. As any bright-eyed
entrepreneur with a dream project will tell you, the lawyers and the securities
laws make it very expensive and time consuming to raise capital for a small
The central goal of the Securities and Exchange
Commission is to facilitate companies' access to capital while at the same time
protecting investors. More often than not, the securities laws and regulations
are put in place due to some prior malfeasance. Limitations on the sale of
securities are in place because there were (and still are) lots of shady
characters trying to make a quick buck by de-frauding investors.
The Obama administration and the Congress think the
regulatory burdens need to be removed to encourage small business capital
formation. I'm going to guess that they are fans of Kickstarter, a website that allows
entrepreneurs and artists to raise capital for their projects. (I'm also a fan
and have contributed
504 allows a public offering to investors (including non-accredited
investors) for securities offerings of up to $1 million. There is no limit on
the type of investors, so they need not be accredited investors. There
are no prescribed disclosures and no limitations on resales of the securities.
The Rule generally does not allow companies to solicit or advertise their
securities to the public.(Of course, the antifraud and other civil liability
provisions of the federal securities laws are still applicable.)
However, these offerings are subject to state "blue sky"
regulation. That means having to jump through the patchwork of state securities
laws, depending where your target investors are located.
How does Kickstarter get around this? It doesn't. Capital
for Kickstarter projects cannot be for securities or lending. As a patron, you
do not get your capital returned. Often, you'll get the end product that the
artist or entrepreneur was hoping to produce. (My son is patiently waiting for
our pack of trebuchettes
Generally, the term "crowdfunding" is used to describe a
form of capital raising whereby people pool money, generally as small
individual contributions, to support a specific goal. Since the capital raising
did not provide an opportunity for profit participation, initial crowdfunding
efforts did not raise issues under the federal securities laws.
Access to Capital Act would create a new exemption for small companies,
allowing them to raise up to $5 million. The limitation would be that
investments are limited to the lesser of $10,000 or 10% of the investor's annual
President Obama cheered for crowdfunding
as part of the American Jobs Act unveiling. I failed to find and proposed
legislative changes in his proposed bill.
I'm for fueling entrepreneurial growth in this country.
I'm concerned that the changes could lead to an onslaught of fraud. I think
Kickstarter works well because you are funding the effort. You are not seeing
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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