The SEC’s equity crowdfunding rules finally go into effect this month almost four years after Congress passed the JOBS Act, requiring the relaxing of certain rules on raising funds. So what does equity crowdfunding actually look like? Here is a primer:
There is no denying that the pool of potential investors is larger with these crowdfunding rules, but the limitations (size of the offering and caps on individual investment), the required use of funding portals, and the regulatory burdens (disclosure, audit and filing requirements) diminish what many thought would really open up fundraising possibilities.
I continue to believe the most effective way to raise real capital for most startups is probably with a standard private placement, including perhaps under the relaxed rules regarding general solicitations (i.e., public advertisements) under Regulation D. This limits (in most cases) the pool of investors to accredited investors, unless the company makes extensive public disclosures, but accredited investors are generally able to write larger checks, and there is no limit on the amount a company can raise.
Using a general solicitation under Regulation D, the company can 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 crowdfunding.