Trending News: Equity Crowdfunding Update

On Wednesday, October 23, 2013, the Securities and Exchange Commission today voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding.

 The Jumpstart Our Business Startups (JOBS) Act, signed into law on April 5, 2012, was intended to create many needed jobs in the private sector, in part, by making it easier for small companies to raise capital outside of the highly regulated public securities market. The means of raising capital was to mimic the crowdfunding model used for a half-dozen years to raise funds for artistic endeavors (see Vol 3, Issue 1 of The Issue from Jan 2013), and the means by which non-profits and charitable organizations have raised funds for decades: many small individual contributions from a wide population of people.

 Title III of the JOBS act directed the SEC to write rules covering the exemption Congress provided for crowdfunding under the ACT, and created a new entity, the funding portal, to allow Internet-based intermediaries to act as exchanges bringing investors together with small companies over the Internet without having to register with the SEC as brokers.

 The proposed rules would:

  • allow but limit the amount that individual investors could invest in a 12 month period,  (securities bought through the portal would have to be held for at least 1 year),
  • limit the amount of equity companies could raise through crowdfunding to $1 million in any 12 month period,
  • Prohibit certain companies (non-US companies, companies already subject to SEC reporting requirements, certain investment companies, companies whose primary purpose is M&A transactions, and companies not in compliance with the proposed crowdfunding rules) from engaging in crowdfunding,
  • Prescribe reporting and disclosure requirements for companies engaged in crowdfunding activities to be filed with the SEC (significantly lower requirements than a public company), and
  • Establish rules and regulations governing funding portals.

Stay tuned for a more complete description of the SEC’s proposed regulations in a future edition of The Issue.

One of the main concerns among the accounting and investing community is how the SEC is going to, in essence, protect Soccer Moms from losing their children’s college funds in an era where “safe” investment returns are paltry, and there is an ever increasing pressure to get higher investment yields. And how will the SEC protect unsophisticated investors from scams. As USA Today points out, “Crowdfunding today is rife with examples of consumers donating money to entrepreneurs, only for those people to take the money without ever producing the product or service that was promised.” Kevin Laws, chief operating officer of the country’s largest network of start-up founders and funders, has expressed serious reservations about what the Securities and Exchange Commission has proposed, notably the portal operators cannot take equity in any form, that they can’t give advice, can’t reject deals that don’t meet predetermined criteria, yet may be liable if a deal turns out to be fraudulent.

Make Your Opinions Known

The SEC is seeking public comment on the proposed rules for the 90-day period following their publication in the Federal Register. We at CFOs2Go would encourage all interested parties to voice their opinions to the SEC, regardless of which side of the issue you reside on. Only through the consideration of all points of view will SEC have the best opportunity to provide regulations which both ease the burden of raising capital for small companies while balancing the protection offered to small investors.


Chris Chillin LRChris leads the Financial Systems and Reporting, Technical Accounting and Stock Compensation, and Enterprise Risk Management practice groups and is a senior member of the International practice group.   He is expert in designing and implementing financial management solutions utilizing technology.

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