Can Equity Crowdfunding Be Fixed?

With the adoption last year of the Regulation Crowdfunding (Reg CF) exemptions by the Securities and Exchange Commissionprivate companies can now raise capital from all 230 million American adults. Until now, businesses have been restricted to fundraising from only 8.5 million accredited investors — anyone who makes $200K a year individually or $300K a year jointly with a spouse, or has a net worth of $1 million.

While it’s only been four months, one thing is very clear — equity crowdfunding, under the current rules, doesn’t work. Or as some might say, the exemptions were dead upon arrival.

Let’s understand why equity crowdfunding doesn’t work.

Financial review requirement by third party CPA

Reg CF requires that businesses raising more than $500K have GAAP Standard financials prepared and ready to share. While it’s important to provide potential investors with transparency into your business, the reality is that early stage companies generally don’t have GAAP financials prepared. And spending $5-10K on a CPA to prepare them is excessive.

Form C

Reg CF requires businesses to file a Form C with the SEC before they can solicit investors. A Form C is a 25-page document that can require upward of 50 hours of work to complete. You’re going to want a lawyer to review and help prepare some of it, so expect anywhere from $1-5K in legal costs, which most startups don’t have.

$1 million funding limit

Reg CF caps a business at raising $1 million in a 12-month period. For companies interested in fundraising smaller amounts, this isn’t a problem, but for many businesses who are interested in using Reg CF to raise more than $1 million, this becomes a non-starter.

12(g) rule

This rule stipulates that if a business uses Reg CF to successfully raise capital and crosses $25 million in assets, they’ll be required to begin reporting as a public entity. This potentially creates a situation where a company could be forced to go “public” whether they’re ready to or not.

Post fundraising shareholder management

Under Reg CF all investors must be included on a company’s cap table. Often times when a startup…