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“Crowdfunding” and Other Recent Capital-Raising Initiatives for Startup Companies

“Crowdfunding” and Other Recent Capital-Raising Initiatives for Startup Companies

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Published by: Crowdsourcing.org on Jan 31, 2012
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“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 prot 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,
Hartforddbrooks@goodwin.com(860) 251-5917 
Peter J. Bilfeld,
 (203) 324-8151
1 Seehttp://theinvestmentsblog.blogspot.com/2011/04/best-ipo-market-on-earth.htmland see alsohttp://www.
.2 Seehttp://www.rimonlaw.com/blog/2011/06/29/trading-on-the-secondary-market.
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 jhillman@goodwin.com(860) 251-5091
Marcus D. Wilkinson,
Hartfordmwilkinson@goodwin.com(860) 251-5937
amendment has been proposed by Rep. Caroline
Maloney (D-NY) to require a notice ling tostate securities regulators, which notice ling
would provide information necessary to preventfraud. The bill in its current form also exemptstransactions in crowdfunded securities from stateregistration by way of amendment to Section18(b)(4) of the 1933 Act. This has drawn the ireof state securities regulators who have expresseda desire to regulate crowdfunded securities. Ina November 3rd letter to House Speaker JohnBoehner (R-OH) and Minority Leader Rep. NancyPelosi (D-CA), NASAA President Jack Hersteinvoiced his concern about the preemption of stateauthority. To allay state regulator concerns overpreemption, the House adopted an amendmentto the bill allowing states to enforce violationsstemming from crowdfunded securities. Stateregulators, however, have indicated that theamendment does not adequately addressinvestor protection concerns and seek furtherpowers in order to review securities prior to theiroffering.
Lifting Ban on General Solicitation 
H.R. 2940 – the “Access to Capital for JobCreators Act,” like its companion bill H.R.2930, aims to foster capital formation and spur job growth by lifting the long-standing banon general solicitation of accredited investorsin securities offerings relying on the privateplacement exemption under Section 4(2) of the1933 Act and/or Rule 506 under the RegulationD safe harbor.
The bill directs the SEC to reviseRule 502(c) under Regulation D no later than 90days after the date of enactment of this Act sothe general solicitation and general advertisingprohibitions do not apply to Rule 506 offerings.The SEC is still studying this issue, and theagency’s new Advisory Committee on Smalland Emerging Companies recently met todiscuss lifting the ban. Some, particularlyregulators, continue to support the ban on thegrounds that it helps prevent securities fraud
by making it more difcult for an unsavory
issuer to attract investors. Others believeremoving the prohibition will effectivelywiden the pool of accredited investors aspotential capital for small businesses, spurringinnovation and job growth in the United States.
Raising the 499 Shareholder Cap under Securities Exchange Act of 1934 
H.R. 2167 seeks to amend the SecuritiesExchange Act of 1934, as amended (the“Exchange Act”) to change the thresholdnumber of shareholders for requiredregistration. Section 12(g) of the Exchange Actrequires a company to register its securitieswith the SEC within 120 days after the last
day of its scal year, if, at the end of the scal
year, the securities are “held of record” by500 or more persons and the company has“total assets” exceeding $10 million. H.R.2167 proposes to increase the shareholderthreshold from 500 to 1,000 and exclude from
the denition of “held of record” persons
receiving securities pursuant to an employeecompensation plan in transactions exemptfrom registration under the 1933 Act.The SEC is also in the midst of conducting astudy on the right test for reporting triggersunder the Exchange Act. Of particular concernis shareholders that hold their shares in “street
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4 The U.S. Senate is considering S.B. 1831 which is identical to H.R. 2940.

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