United States: Crowdfunding Update: Still Stuck

On April 10, 2014, the Investor Advisory Committee to the Securities and Exchange Commission issued six recommendations with respect to the SEC's proposed crowdfunding regulations.  The recommendations amount to a re-write assignment to the SEC principally to make it harder for smaller investors to participate in crowdfunding offerings with a stated goal of investor protection. This has furthered criticism of the SEC in this area. All in all, the current status of crowdfunding reminds me of a catch phrase from one of my young daughter's favorite books about the various efforts of a cast of woodland creatures to free a duck stuck in some mud, "no luck, still stuck."

By way of background, crowdfunding, an internet-based method for capital raising by start-up companies from a wide range of investors, was forced on the SEC in 2012 by Congress under the 2012 Jumpstart Our Business Startups Act ("JOBS Act"). The legislation was supposed to allow a broad range of the general public to invest in start-ups and participate in those companies' growth prospects. This type of a system would jostle bedrock securities regulation principles in place for decades which generally require a company seeking to raise capital to either file a full-blown registration statement for the securities before sale to the general public (think IPO on the NYSE) or conduct a private placement.  A full-blown registration statement is subject to SEC vetting, disclosure and marketplace scrutiny by investment professionals. This provides investors with the benefit of full information and regulatory oversight which, in theory, reduces opportunities for fraudsters to fleece ordinary investors through the sale of bogus securities or unscrupulous marketing or trading activities. In a typical private placement, the issuer markets the securities in a much more limited fashion to wealthy, sophisticated investors (called "accredited investors in SEC parlance) who can both look after themselves and afford to lose the money invested. In this way, the securities regulators seek to protect those investors most in need of safeguards while allowing for capital raising necessary to growth in the economy.

One critique of this regulatory regime is that ordinary investors are not able to "get in early" on promising companies in the same way that venture funds and wealth angel investors can.  Enter crowdfunding via the JOBS Act. The statute essentially opens investment in these types of companies up to ordinary investors subject to a lighter regulatory hand than would otherwise apply in securities offerings. State and federal securities regulators generally opposed this as they viewed it as more open to fraud and, in any event, too risky for people who can't afford to own this high-risk class of investment. Nevertheless, the legislation directed the SEC to issue rules to implement the crowdfunding provisions of the JOBS Act.

Only about a year and half later, the Securities and Exchange Commission finally unveiled "Regulation Crowdfunding," – the proposed regulations. Highlights of the proposed regulations follow:

  • Eligible businesses can raise up to $1 million through one or more equity crowdfunding offerings during a 12-month period. These securities offerings are exempt from further SEC regulation, as long as the offering is conducted over the internet through a registered intermediary or "funding portal" and complies with the provisions of Regulation Crowdfunding. Securities that are sold through a crowdfunding offering are subject to a one-year holding period, during which time investors cannot trade or sell the securities on the secondary market.
  • Graduated financial disclosure requirements based on the size of the offering. Issuers offering securities in the amount of $100,000 or less are only required to file income tax returns for the most recently completed year and financial statements certified by the principal executive officer. Those offering between $100,000 and $500,000 must file financial statements reviewed by an independent public accountant. Issuers offering greater than $500,000 of securities must file audited financial statements prepared in accordance with GAAP.
  • Regardless of size, all issuers are required to disclose certain information about the business, including information regarding the company's current business plan; a description of the financial condition of the company and anticipated use of the offering proceeds; information about officers, directors, and owners of 20% or more of the company; the target offering amount and deadline for reaching that target; the price of the securities and the method used to determine the price; and relevant risk factors. The SEC has proposed that all issuers file these mandated disclosures on the EDGAR electronic filing platform using a new "Form C." Issuers will also be required to file annual reports with the SEC that they must make available to all investors.  This obligation continues until the issuer becomes a reporting company (files quarterly, annual and periodic reports like an NASDAQ or NYSE company), all crowd-funded securities are redeemed or bought by another party or the issuer goes out of business.
  • Over the course of a 12-month period, individual investors are permitted to invest in businesses through registered intermediaries, referred to as "crowdfunding portals," subject to certain aggregate investment limits based on the investor's annual net income or net worth. If an individual investor's annual net income or net worth is less than $100,000, that individual would be permitted to invest $2,000 or 5 % of their annual income or net worth, whichever is greater. If an individual investor's annual net income exceeds $100,000, that individual would be permitted to invest up to 10% of their annual income or net worth, up to a maximum of $100,000 of securities purchased through crowdfunding.
  • Other requirements include the electronic delivery of certain investor education materials and regulations related to the conduct and compensation of the funding portals.

Public comment on those rules closed on  February 3, 2014. The public comments show that the proposed rules were met with strong criticism from concerned investors, individuals, businesses, and state regulators throughout the 90-day public comment period. Investors and businesses generally took issue with the proposed investment limitations, the $1 million offer cap, and the potentially burdensome compliance costs and disclosure requirements. State securities regulators, on the other hand, voiced concerns over the risk of fraud and insufficient investor protection mechanisms.

The Investor Advisory Committee considered these comments and clearly sided with the regulators in making six recommendations certain highlights of which are set forth below:

  • Limit investor exposure to losses by further limiting the annual amount that can be invested by non-accredited investors in crowdfunding offerings "...to avoid investor concentration in start-ups as an asset class."
  • Require portals to collaborate to ensure that investors can't "portal-hop" and further concentrate investments in start-ups. Essentially, under the proposed regulations, portals can control investor participation within the net worth and income requirements only on that portal. An investor could go to a different portal and invest in further start-ups because portal 2 will not know about the investor's participation in portal 1. The recommendation would require portals to share data to try to avoid this.
  • Allow portals to reject investors and offerings "that they believe could pose an undue compliance or fraud risk."
  • As the committee viewed the portion of the proposed regulations that required certain educational materials to be provided to investors about investing and its risks as being too passive, the committee wants the SEC to "..take further steps to ensure that educational materials clearly convey the required information and are reviewed and, to the degree possible, understood by investors." Think online quizzes for investors here.
  • Force the portals to provide the disclosures and educational materials to the investors electronically and not just by pointing to certain links to pages on the website.
  • As the committee was critical that the proposed regulations provided that crowdfunding offerings would not be integrated with other offerings conducted by the issuer, it recommended that the SEC "...require crowdfunding offerings to be integrated with offerings in reliance on a separate exemption where needed and appropriate to prevent evasion of regulatory requirements."

The net result of all this is that we should expect further delay before final regulations are implemented. In addition, there is no reason to anticipate that, when implemented, the final regulations will be any less complex than the proposed regulations. For instance, it is clear that in addition to the offering amount limitations, the reporting and disclosure requirements imposed by Regulation Crowdfunding will not be insignificant and could result in considerable audit, compliance, and intermediary commission costs for issuers. When compared with a standard private placement to accredited investors, it will be rare when the crowdfunding option prevails after a cost/benefit analysis. In any event, don't expect the crowdfunding duck to be out of the muck any time soon.

The author gratefully acknowledges the contributions to this piece made by Bradford M. Melson, a law clerk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Brown Smith Wallace
Strasburger & Price, L.L.P.
Strasburger & Price, L.L.P.
McDermott Will & Emery
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Brown Smith Wallace
Strasburger & Price, L.L.P.
Strasburger & Price, L.L.P.
McDermott Will & Emery
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions