Ernest Holtzheimer blogs with some statistics about how the new JOBS Act-authorized forms of securities offerings are being used following enactment. Both the revamped Regulation A and new Regulation Crowdfunding have seen somewhat underwhelming use to date. The most common objection to Regulation Crowdfunding, the $1 million offering limitation, has led companies to consider using Regulation A, which is more involved compliance-wise. Legislation to increase the offering cap for Regulation Crowdfunding might have a better chance of enactment with the coming all-Republican government, with its anti-regulatory bent. Of course, companies that are willing to limit their investor base to all accredited investors aren’t subject to the offering limit.

Holtzheimer mentions an advantage of crowdfunding that is less remarked-upon than some others: that crowdfunding can help save company founders time, as compared to more traditional forms of investment like angel investment and venture capital. Traditional capital-raising involves spending an enormous amount of time with potential investors, explaining the business, responding to due diligence requests, etc. In addition, when there is an investor syndicate rather than just one investor, the different members of the syndicate may have different requests/concerns, so the process is like herding cats. In contrast, at least in theory, with crowdfunding and Regulation A, once the proper disclosure is prepared and posted for investor review, the investors make their choices, and if there’s enough interest, you just go ahead and close.

…

Crowdfunding as a Time-SaverRead More »

The effectiveness of Title III crowdfunding got the high-profile Sunday New York Times treatment this past weekend. I think it will take some time for the flow of these deals to come, as portals apply for and receive approval from the SEC and the overall infrastructure develops.

The Times article has a quote from a Mintz Levin securities attorney expressing skepticism and noting that unlike venture capital investing, crowdfunding does not provide institutional validation of a company. I would agree that it doesn’t, but at the same time, it shouldn’t be considered a red flag. Because of the $1 million per year offering limit currently applicable to Title III crowdfunding, this route will only make sense if the business can execute its plans with those kind of funds. Capital-intensive ventures, like those in the life sciences industries, will likely continue to need venture funding. But for those who don’t, even if they don’t get the external validation of an institutional investment, they can get the funds they need to operate relatively easily and without the onerous terms often imposed by venture investors.

The article closes with an interview with a potential crowdfunding investor who said she skimmed the offering circular but says she’s financially sophisticated enough to take the risk. (The offering circular, which is linked to in the article, is actually for a Regulation A+ offering, not Title III crowdfunding.) Much of the commentary about risks for fraud in recent years has focused on Title III crowdfunding, rather than other JOBS Act initiatives, like Regulation A+, but ironically it’s only Title III crowdfunding that has the strict investment limits imposed on investors with low net worth or income, which protect them from being wiped out. The investor profiled in the Times may well lose a lot of money on her Regulation A+ investment (as she could, as well, by investing in a public company), but she’d automatically limit her risk exposure by sticking to Title III crowdfunding offerings only, because of these limits.