has obviousappeal in this era of social media and rapidly expanding Internet penetration. Forcompanies seeking to raise investment dollars, however, crowdfunding is largelyunavailable as a tool to attract investors based in the U.S. Crowdfunding iscurrently impractical in the U.S. because all securities offered to U.S. investorsmust either be registered with the U.S. Securities and Exchange Commission(SEC) or there must be an applicable exemption from registration. Registrationwith the SEC is very expensive and time consuming, and exemptions fromregistration are generally not available if the security is offered to the generalpublic.Fortunately, crowdfunding and the anachronistic restrictions on the publicofferings of securities are receivinga lot of attentionthese days. After thePresident mentioned a proposal to exempt crowdfunding from registrationrequirements during his jobs speecha few weeks ago, the attention reached feverpitch. It even extended to Congress. Since the President's speech, there havealready beentwo Congressional hearingsregarding an exemption andone billhasbeen introduced by a House Republican. The House bill is substantially alignedwith the President's proposal. Such bipartisan support is promising. The SEC isalso exploring potential rule changes to exempt crowdfunded offerings that wouldnot require legislative action.Despite all the positive signs, however, the future of crowdfunding remains veryuncertain. Three primary risks threaten the potential of crowdfunding to become asignificant source of startup capital in the near future.
Risk 1: The voices opposed to a crowdfunding exemption win the day.
Support for a crowdfunding exemption isnot universal.On September 21, HeathAbshure, a representative of the association of state securities regulators, testifiedbefore a House subcommittee regarding small business capital formation. In hiswide-rangingtestimony,Abshure made a strong case for investor protection andfor the unique role state securities regulators play at the local level. Thecrowdfunding bill that was introduced in the House includes a state preemptionclause, effectively exempting crowdfunded offerings from state registration
requirements. As Abshure's testimony indicates, this will likely be met withcontinued opposition from state securities regulators who have seen their scope of authority recede as federal regulation has increasingly preempted state securitieslaws.The SEC also has expressedconcernsaboutinvestor protectionand may bereticent to carve out a significant exemption. In 1982, the SEC adopted RegulationD, which, among other things, included Rule 504, the "Seed Capital" exemption.Under Rule 504, small issuers (under $1 million) were allowed to offer and sellsecurities to an unlimited number of people regardless of sophistication; suchissuers were exempted from delivering any specified information to investors; andsuch issuers were allowed to engage in general solicitation and advertising. After anumber of abuses surfaced(facilitated by burgeoning Internet use), the SEClimited the scope of Rule 504. This history illustrates why the SEC may be risk averse in adopting a significant exemption regime for crowdfunding.
Risk 2: The final regulations are too narrow, gutting crowdfunding of itspotential.
The SEC has voiced some guarded support for the principle of a
exemption related to crowdfunded offerings. In aletter,SEC Chairman MarySchapiro described one conception of crowdfunding as an offering of up to amaximum of $100,000 with individual investments capped at $100. The currentHouse bill, meanwhile, would exempt crowdfunded offerings of up to $5 millionand cap individual investments at $10,000. Abshure's Congressional testimonyechoed the SEC's more restricted vision of crowdfunding. Referring to the limitsincluded in the House bill, he stated that "the caps on these offerings are simply toohigh." In support for this position, he argued that since more than half of households have less than $25,000 in savings and investments, a $10,000 losswould be "crippling" to most investors (but still not significant enough toreasonably pursue a private cause of action).If legislation or SEC rule changes create a crowdfunding exemption at the$100,000 offering / $100 individual investment level, it will be anunrealisticsourceof real startup capital for most entrepreneurs. Most crowdfunding platformsintend to require a minimum commitment level in order for any funds to beinvested and spent by the startup. With such low individual investment caps, veryfew deals would meet these minimums and actually get done. Furthermore, if thefinal exemption did not include state preemption, significant compliance costs