Crowdfunding – What is it and Can it Work for Traditional Private Offerings?

Crowdfunding – What is it and Can it Work for Traditional Private Offerings?

“Crowdfunding” is the increasingly popular practice among savvy entrepreneurs of soliciting smaller contributions over the internet from larger numbers of people in exchange for “rewards” rather than ownership interests in the business. Assuming one has an idea appealing enough to garner interest from “crowds” prepared to invest with little or no returns, the crowdfunding concept is genius in its simplicity—it is essentially an internet bake sale.

The rewards are intended to take the place of securities, so entrepreneurs raise capital without giving up ownership or control of the business or profits. Also, because “securities” are not being sold, businesses can post solicitations to the general public without having to go through the expensive and cumbersome process of meeting state and SEC securities registration requirements.

On September 15, 2011, legislation was introduced in the House of Representatives (H.R. 2930 and H.R. 2940) that would create a crowdfunding exemption from SEC registration requirements, making crowdfunding available for more traditional private offerings. In its current form, the exemption would apply to businesses selling less than $5,000,000 in securities, with individual investments limited to the lesser of $10,000 or 10% of the investor’s annual income. The exemption would also preempt state securities registration laws, which can actually be more cumbersome than SEC requirements. The preemption provision has been met with opposition by the North American Securities Administrators Association, which is made up of state and provincial securities regulators. While not opposing the general idea of a crowdfunding exemption, NASAA has raised concerns that the lack of any state review process would encourage fraud on investors. Other issues being considered include disclosure requirements, resaleability of crowdfunded securities and potential regulation of websites hosting crowdfunding.

The legislation is in its nascent stage and the parameters of the exemption will have to be developed over time. However the level of legislative support and the buzz surrounding crowdfunding should keep the process moving forward.

Contributed by Susan George; 713.850.8601 or

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