Crowdfunding: The Future of Startup Financing?

“Is [crowdfunding] the future of startup financing? The House of Representatives overwhelmingly passed HR 2930, the McHenry Crowdfunding Bill, in a 407-17 vote. First proposed in September of 2011, the McHenry Crowdfunding Bill went through just one revision in committee and is now in front of the Senate. If the Senate approves, crowdfunding looks to join venture capital, private equity, and angel investing as a new way for startups to acquire financing.” (From House of Representatives Passes Crowdfunding Bill by Priore Law Group)

Could crowdfunding provide a viable option for financing new ventures? Startups and small companies seem to think so, and are pushing legislators and regulators to change the rules and allow them to seek out and obtain funding from investors via the internet. From lawyers and law firms on JD Supra, a look at what crowdfunding might mean for startups:

It would make it easier to raise capital:

“The [President’s Jobs] Council recommended that smaller investors be allowed to use crowd funding. This makes sense, as a practical matter, because at some level small amounts of money should not trigger onerous SEC rules and regulations. If the law opens up and allows crowd funding, it will probably prove to be a very powerful fund-raising tool for small businesses.” (From The President’s Jobs Council Has Some Good Ideas For Startups! by Davis Wright Tremaine LLP)

The SEC wants it to happen:

“At an SEC hearing on September 15, 2011, Meredith Cross, the SEC Director of the Division of Corporation Finance, testified that one of the major areas that the SEC is looking at is ‘crowdfunding’ in response to Chairman Shapiro’s urging the SEC Staff to ‘take a fresh look at some of our offering rules to develop ideas for the Commission to consider that may reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection.’” (From Legislative Proposals to Facilitate Small Business Capital Formation by Morrison & Foerster LLP)

The basic rules would still apply:

“In the end, crowdfunding is subject to what now seems like an old rule of thumb: Just because you are raising money over the Internet or through social media does not mean that the same “old” rules as to the offer and sale of securities no longer apply.” (From Socially Aware: The Social Media Law Update – Vol. 2, Issue 4 – August 2011 by Morrison & Foerster LLP)

It may not be as easy as it appears: 

“The problem is, as soon as you attach anti-fraud liability to reporting, the stakes become too high to do the reporting without sophisticated legal help, which of course is the expense that the proponents of this proposal are trying to avoid.” (From Could a Proposed Crowd Funding Securities Exemption Ever Catch On? by Davie Law Group)

The risks are significant:

“Can anyone imagine a higher-risk form of investing than one where an online stranger is allowed to say whatever she or he wants to whomever she finds online, no matter how elderly or otherwise vulnerable? … [T]here will be no higher-risk form of investing than crowdfunding investing. (From Crowdfunding and Mc Henry’s Own Reg D Fraud by Law Offices of Douglas Slain)

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