October 7, 2011
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Crowdfunding, or Raising Capital over the Internet - Wave of the Future?
On September 11, 2011, as part of President Obama’s Startup America initiative, the White House announced that it will pursue efforts to reduce the regulatory burdens on capital formation by small businesses. This initiative includes working with the Securities and Exchange Commission (the “SEC”) to establish a “crowdfunding” exemption from SEC requirements for companies raising less than $1 million (with individual investments limited to $10,000, or 10% of the investor’s annual income), as well as raising the cap on “mini-offerings” (under Regulation A) from $5 million to $50 million.
What is Crowdfunding?
Crowdfunding is the enterprise of raising small amounts of money from a large number of investors, typically over the internet. Over the years, various crowdfunding websites have sprung up, such as Kickstarter, Lending Club, Prosper, Profounder, IndieGoGo, and Kiva.
Pabst Beer Securities, Anyone?
Recently, two advertising executives, Michael Migliozzi II and Brian William Flatow tried to raise $300 million over the internet to buy Pabst Brewing Co. Investors were promised “Certificates of Ownership” and beer with a value equal to the amount invested. As an example of the power of crowdfunding, the two men reportedly received over $200 million in pledges from more than 5 million people in a six-month period, before the SEC shut them down for offering to sell securities without filing a registration statement or qualifying for an existing exemption from registration.
Meshing Securities Laws with Crowdfunding
The Pabst Brewing Co. example demonstrates that the existing securities laws do not easily accommodate internet capital raising. Unresolved issues are myriad, such as:
What Comes Next?
On September 15, 2011, Meredith Cross, the Director of the SEC’s Division of Corporation Finance, testified before the House of Representatives’ Oversight and Government Reform Committee that she believes the SEC will consider crowdfunding “in the near future.” In addition to the White House’s proposal, a crowdfunding bill (H.R.-2930) has already been introduced in the House by Patrick McHenry (R.-N.C.), who chaired the committee hearing. There seems to be support for amending securities laws and regulations to permit crowdfunding as a jobs-creation measure, while continuing to protect investors.
As developments occur, we will issue additional updates. To discuss this client alert or any securities law matter, please contact your Lathrop Gage attorney or any of the attorneys listed on this alert.
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