Crowdfunding for equity is one of those ideas that appeals to a lot of people. It has “crowd” appeal, you could say. Why not allow a great number of individuals (thousands) to each invest a little bit of money to fund projects that would otherwise not get funded? Especially projects like rooftop solar projects or similar ventures which improve society as a whole? Isn’t this a great idea?
But hold on a minute. We have a little snag we have to deal with first. That snag being state and federal securities laws. These laws were put in place in the aftermath of the stock market crashes that preceded the Great Depression, and strictly regulate the business of selling securities. These laws prohibit the crowdfunding future we thought was just about to be evenly distributed. Under these laws you can’t sell even $10 worth of securities without first going through an expensive process with state and federal regulators. There is no “de minimis” exception to the securities laws.
Under state and federal law, before you can sell any security, you must first either register the security with the securities regulators (which costs a ton) or find an exemption under which the security can be sold without registration. Most private company stock offerings proceed according to an exemption simply because the cost of registration is so great.
The problem for our crowdfunding future? Exemptions are limited in number and are typically subject to a number of conditions and limitations. There is currently in place no “crowdfunding” exemption.
Take my example, the company that wants to sell equity to build a rooftop solar or wind project by selling shares at the local coffee shop (just drop that $100 off while you pay for your coffee). The company would find it very hard (impossible actually) to find a securities law exemption that would allow it to proceed in the manner described.
How can crowdfunding be reconciled with this very fundamental no-public-offering concept that has been a part of the securities laws since the 1930s?
If issuer can’t generally solicit, is it still crowdfunding? Well, it is still crowdfunding, at least according to the JOBS Act.
Contrast this with Section II of the JOBS Act. Under Title II, issuers in all accredited offerings are going to be able to put up billboards along the highway if they want, advertising “Buy Our Stock!” But that is for a different blog post.
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2 Responses to "What’s Crowdfunding Without Advertising?"
I wish someone would create a chart illustrating the allowable paths to securities issue. A map of the rules currently in place that allow unaccredited investors, limits on amounts, etc.
This is Washington specific but might be helpful to you.