Crowdfunding for Startups and Emerging Companies: Regulatory Framework, Pros and Cons, Avoiding Pitfalls

Crowdfunding is the process of receiving investment capital from a variety of sources using online tools and collecting smaller sums of money from a larger number of private investors. This approach differs from trying to attract sizable investments from venture capital firms or angel investors--a business capital strategy that's out of reach for many startups and established small businesses alike.

Title III of the Jumpstart Our Business Startups Act in 2012 (JOBS Act) introduced a new registration exemption under Section 4 of the Securities Act for crowdfunding, allowing issuers to sell unregistered securities to the general public under certain circumstances. Subsequently, Regulation Crowdfunding (Regulation CF) was promulgated by the SEC to allow issuers to use the internet and social media for securities offerings to raise capital from a large number of people in relatively small individual amounts. This approach is different than traditional private placements that do not permit any general solicitation and forces issuers to offer only to accredited investors (as defined by SEC regulation).

There are multiple factors and rules to consider before choosing to engage in a crowdfunding campaign. One size does not fit all. Regulation CF prescribes several rules governing the offer and sale of securities under Section 4(a)(6) of the Securities Act, which must be followed to avoid harsh penalties. These rules generally pertain to limitations on the amount of investment and capital raised, issuer eligibility, issuer disclosure requirements, restrictions on resales, crowdfunding platforms, and limitations on advertising the terms of the offering.

Listen as our authoritative panel of experts explores the world of crowdfunding and provides best practices and minimum safeguards essential for investors and issuers. The panel will also address the pros and cons of crowdfunding and how it compares to other more traditional forms of capital raising.