Making Equity Crowdfunding Work for the Unaccredited Crowd

The idea behind equity crowdfunding is both simple and revolutionary. Entrepreneurs will be able to use the Internet to pitch business ideas to millions of potential investors and allow “anyone with a few dollars to spend [to] become an investor.”

While this may seem like an obvious use of the Internet, until now, securities laws have prohibited new ventures from using this approach to raise capital from “average Joes” and other unaccredited investors. However, the Jumpstart Our Business Startups (JOBS) Act creates a new “crowdfunding exemption” that will allow companies to raise up to $1 million every twelve months by selling their stock (or other unregistered securities) to both accredited and unaccredited investors, provided that the sales are made through registered intermediaries. This article summarizes why the crowdfunding exemption is important, explains how its expected costs are problematic, and proposes ways to mitigate those costs without sacrificing investor protection.


Importance of the Crowdfunding Exemption

The crowdfunding exemption is important because it allows for new sources of capital for new ventures. New ventures, and the jobs they create, are significant to our economy. New ventures also often need external capital, but due to securities laws, it is difficult for them to raise that capital. When selling stock and other securities, new ventures (and other issuers) must either register their securities under the Securities Act of 1933 (the Securities Act) or satisfy federal and state requirements for an exempt offering.


On average, issuers must pay $2.5 million to initially register their securities under the Securities Act and an additional $1.5 million each year thereafter to comply with ongoing requirements, making registration impractical for most new ventures. Without the crowdfunding exemption, unaccredited investors are limited in their ability to participate in exempt offerings, and, as of 2010, only 7.4% of U.S. households were accredited based on the net worth standard. Additionally, only a small percentage of the accredited households are likely to participate in exempt offerings.


Thus, the crowdfunding exemption is critical because it will provide cash-hungry new ventures with access to a large and currently under-tapped source of capital—unaccredited investors.


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Posted over 5 years ago