SEC Makes Crowdfunding Useless

By Brian Korn, Lawyer with Pepper Hamilton

Unfortunately, crowdfunding perception does not align with crowdfunding reality. Crowdfunding will not be able to deliver the grassroots fundraising ease for which so many seem to be hoping. After reviewing the enthusiastic postings of entrepreneurs and discussing the concepts in detail with financial and venture industry insiders, many observers believe there is a fundamental disconnect between the promise of crowdfunding, and the system that the SEC will put in place exercising its authority under the JOBS Act. Put another way, the risks, burdens and limitations of crowdfunding render it almost completely useless. And since crowdfunding targets individual investors, maybe that’s a good thing.

Better Ways To Raise Money

Despite the sound and fury, the crowdfunding exemption will do little to help small start-ups raise capital. That’s because it will not be economically feasible for most companies to comply with the filing and disclosure requirements; take on the risk of legal liability; and undertake annual reporting obligations to raise a maximum of $1 million in a 12-month period. A company might as easily consider filing for an IPO and raise enough to cover its offering costs. As demonstrated by the chart below, it is difficult to imagine why a company would opt for crowdfunding instead of other, less burdensome, forms of private placements – for example, a Regulation D Rule 506 raise or a Regulation A+ raise (another creation of the JOBS Act).

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