On June 23, 2016, Shawn McBride was featured in a Huffington Post article titled “What the New Equity Crowdfunding Rules Mean for Business Owners and Investors.” This article is based on the podcast interview with Deirdre Sanborn of The Ambition Project Show on the same subject, which we blogged about just this past week (here).
The Huffington Post article focuses on the implications of the new federal crowdfunding rules, which became effective as of May 16, 2016, mainly for business owners. While equity crowdfunding has potential to help small business raise money from previously unavailable sources (i.e., the general public), it may not be for everyone and the article points out a few things for business owners to consider. For example, Shawn mentions in the podcast that people are a little shocked by how much work they have to do to finalize crowdfunding deals. As the article points out, this is partly in reference to the disclosure provisions of the final rules, which require the offering statement to include a significant amount of information about the crowdfunding issuer and its business, some in great detail, ranging from the price of the security and the amount of the offering to the issuer’s ownership structure and financial statements in accordance with certain standards.
Needless to say, this means high transaction costs for crowdfunding issuers, at times even more expensive than more traditional sources of funding, such as private placements under certain exemptions from the federal registration requirement. As we mentioned in our previous blog post on the proposed crowdfunding rules back in May 2015, the SEC estimated then that companies might have to pay nearly $29,000 for an auditor to review their annual financial statements, which, at almost 6% of the amount raised for a $500,000 offering, could be a show-stopper for many small businesses.
Another consideration that the article talks about is the multiple implications of having lots of small investors. Just imagine the cap table listing numerous, potentially hundreds or more, investors, or mailing important notices to and collecting responses from them. While large public companies may be better equipped to deal with a large number of investors/stockholders, many small businesses choosing to raise capital through crowdfunding might not be. And don’t forget the increased liability concerns, as most small investors tend to be less sophisticated or non-accredited and warrant greater protection under the laws. Viewed in this light, the article cautions that equity crowdfunding, however exciting the concept may be, is not for everyone and that business owners need to think about what is best for their business in the long term.
Again, for a detailed analysis of the federal law and related topics, please see our previous posts “Federal Crowdfunding—Finally Here—Goes into Effect on May 16, 2016,” “Crowdfunding: Is It Right for My Business,” “Is It Time To Do Crowdfunding To Raise Money?: SEC Releases Federal Crowdfunding Final Rules,” and “An Easy Way for Texas Companies To Raise Money? A Discussion of the Texas Crowdfunding Exemption.”
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This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
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