“Crowdfunding” and Other Recent Capital-RaisingInitiatives for Startup Companies
In recent years, the U.S. capital marketshave become less attractive to issuers withthe number of initial public offerings in theUnited States dropping precipitously from theventure capital heydays of the 1990s (with anannual average of 530 IPOs) to 126 in 2010.
Meanwhile, the value of private company sharetransactions has grown to $4.6 billion in 2010and is expected to increase to $6.9 billion for2011.
Against this backdrop, the House ofRepresentatives has approved a number of billsthat would (1) provide a registration exemptionfor “crowdfunding,” (2) lift the ban on generalsolicitation of “accredited investors” in privateplacement transactions, and (3) raise theRegulation A registration exemption from $5million to $50 million.
Crowdfunding, a relatively new method of capitalformation in which large groups of individualspool money to support the efforts of smallbusinesses, typically involves small individualcontributions. In the past, crowdfunding didnot trigger securities law issues since these
groups did not receive a prot participation in
the businesses they funded. However, recenttrends show that more and more crowdfundingpools are offering a return on investment capital,and thus require the securities offered for saleto be registered or exempt from registrationunder the Securities Act of 1933, as amended(the “1933 Act”). In response to the concernsraised by many small business owners, onNovember 3rd, the House approved H.R. 2930- the “Entrepreneur Access to Capital Act,”a bipartisan supported bill, which receivedsome support from the White House. The billproposes to exempt from registration underSection 4(6) of the 1933 Act securities offeredfor sale by companies raising $1,000,000 or less($2,000,000 or less if the issuer provides audited
nancial statements to investors), provided that
individuals may invest no more than $10,000 or10% of their income, whichever is less.
As passed, the bill also requires that anintermediary or the issuer provide disclosure toprospective investors on the issuer’s website onthe speculative nature of investments in startups,including risks related to illiquidity; provide theSecurities and Exchange Commission (“SEC”)with the same level of access to the issuer’swebsite; and mandate certain sophisticationand suitability requirements of investors. An
Questions or Assistance?
For more information, pleasecontact one of the followingmembers of our BusinessGroup:
Donna L. Brooks,
Peter J. Bilfeld,
1 Seehttp://theinvestmentsblog.blogspot.com/2011/04/best-ipo-market-on-earth.htmland see alsohttp://www.
3 The U.S. Senate is also considering S.B. 1791 or the “Democratizing Access to Capital Act of 2011,” which, like
H.R. 2930, exempts crowdfunded securities from registration, but with two additional investor protections. UnderS.B. 1791, the exemption only applies if an intermediary is used and an investor’s aggregate annual investmentdoes not exceed $1,000.
Jason C. Hillman,
Hartford firstname.lastname@example.org(860) 251-5091
Marcus D. Wilkinson,