Will New Crowdfunding Regulations Work for Your Company?

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Crowd Funding- Effective May 1, 2016

Effective May 1, 2016 Title III of the JOBS act allows non accredited investors to participate in equity raises.

There are filing requirements (Regulation C under the SEC),   more fees and expenses, and more transparency than under Title I. Three parties are needed for every transaction; the applicant, the intermediary and the investor. The intermediary is either a broker/dealer or a funding portal.

There are limits as to the amounts of funds that can be raised per annum ($1million), a limit on the amount of investors in each venture, and limits of participants depending on whether the investors are accredited or non-accredited. The fees for the accounting services and the legal requirements may be costly and the time needed for compliance may be a barrier for a small start-up company.

The intermediaries charge fees from 5 to 9% for their oversight services.  And there is no guarantee of success. The successful crowdfunding packages are often ventures that have strong consumer appeal.

As a financial consultant working with many SMEs, I have concerns that the applicants often lack the financial acumen and the time needed to provide the detailed financial information that is required.

Crowdfunding may provide a new market for these companies, but many of the companies will have to upgrade their financial record keeping in order to meet the requirements under SEC regulations. In addition, I believe the business risks should be examined and evaluated for each venture by a professional that does not have a proprietary interest in the transaction.

Title III provides fund raising opportunities that might not be available to young companies, but the process requires a time commitment, high out of pocket expenses, transparency and no assurance of success. 

Equity investments often do not always meet the performance levels that are forecast. The investors are relying on economic projections rather than past performance. There are no guarantees offered to investors. We read more about the successes than the failures, but in truth, many equity investments do live up to the projected performance levels.

Once the bad news is made public the entire program may lose its momentum.

Related articles:

Equity Crowd Funding 101

Investment Diversification Should Include Diversity in Investments

Eli Mendoza on Equity and Financing

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