Proposed Equity Crowdfunding Law: Costs Too High

Post to Twitter

The promise that “equity crowdfunding” had for spurring capital investment in small companies seems to be dashed under the glare of looking at the costs that are currently to be incurred by the companies receiving funds.  When the law was first enacted in spring 2012 under Title III of the JOBS Act, and  the SEC issued proposed regulations in October 2013, there was scant notice of whether the law in its present form could actually serve its purpose to permit small companies—including startups—-to raise funds from the “crowd” since there are so many fixed costs that are set forth in the JOBS Act.  The fixed costs include filing annual reports including narrative disclosure, and preparing annual accounting statements, sometimes audited depending on the amount raised ($500,000- $1 million).

I read last week a blog by SeedInvest, a New York-based company which has a website enabling companies to find accredited investors, in which it reported that it had run some numbers, and it concluded that  “offerings under approximately $115,000 would actually result in negative cash flow over a 5 year horizon and larger offerings would result in an exorbitant cost of capital” (my emphasis).   Here is a table that was prepared by SeedInvest to illustrate the shortcomings of the crowdfunding law as presently written, with the total cash costs computed over a five year span:

SeedInvest wrote a letter to the SEC requesting that the reporting provisions of the JOBS Act should not apply to companies which raise less than $350,000.

In some instances, companies and the lawyers representing them are looking to comply with State laws enabling equity crowdfunding, although some of the State laws—including those in the State of Washington–require filings to be made with the State Securities administrator.

For now, it seems that the equity crowdfunding proposals under Federal JOBS Act law simply don’t work on an economic basis for most would-be users of the law, and until Congress amends the law,  startup issuers will have to rely on private placement exemptions from the Federal Securities laws to raise capital.


If you enjoyed this post, make sure you subscribe to my RSS feed!

Comments are closed.