Several weeks ago, we explained that the SEC’s proposed crowd funding rules may make financing your start-up via websites like Kickstarter more time consuming and expensive than is necessary. On October 23, 2013, the SEC clarified and proposed additional crowd funding rules, which, while not as onerous as they might have been, are still far from perfect (and may not be as good as the current financing rules).
The highlights of the new rules are as follows:
Under these rules, a start-up company looking to raise $200,000 to $300,000 of early seed capital would be better off, in my opinion, doing a standard Regulation D offering to friends and family or angel investors. Let’s look at that situation under the two scenarios.
With the crowd funding rules, the start-up may have access to a larger group of potential investors, but this advantage comes with a requirement for financial statements reviewed by an accountant, an obligation to file annual reports with the SEC, and a requirement that the start-up use an SEC registered funding portal, which will take a fee.
Under a standard Regulation D offering, no financial statements (reviewed, audited or otherwise) are required, there is no limit on the amount that can be raised, there are no required annual reports and there is no required funding portal. Really, the only downside is that such a financing would be limited to only 35 non-accredited investors (individuals with a high salary or net worth), but what is the likelihood that a non-accredited investor could cut the start-up a significant check anyway?
If the start-up wants access to a larger pool of potential investors, instead of crowd funding, it should do a general solicitation under Regulation D. This allows the start-up to advertise its fundraising (via website, broadcast or print media) so long as it only sells securities to accredited investors. This would require some work to confirm the investor is accredited, but it doesn’t involve the disclosure and filing requirements of crowd funding.