The below was released in conjunction with Sequel Technology & IP Law (SequelTech), which is Of Counsel to The Berkman Law Firm, PLLC
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Dan Shafer, Shafer Media
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Crowdfunding: A Hot Potato
on Which the SEC Must Make Decisions Soon
WASHINGTON, D.C., Feb. 13, 2013 -- Attorneys at Sequel Technology & IP Law, PLLC (Sequeltech), a well-known intellectual property firm based in Washington, D.C., are calling for the Securities and Exchange Commission (SEC) to move the process of regulating so-called “crowdfunding” Web sites closer to its front burner.
When President Obama signed into law the Jump Start Our Business Startups (JOBS) legislation in April, 2012, he and Congress took official notice of the existence for the preceding few years of a fund-raising technique for small and startup businesses called “crowdfunding.” The law established a broad framework for crowdfunding Web services like Project Kickstarter (http://www.kickstarter.com), Indiegogo (http://www.indiegogo.com) and EquityNet (https://www.equitynet.com/), which actually pioneered the field.
“Up to now, crowdfunding services have been acting as mostly passive intermediaries between companies seeking funding for projects and products and large numbers of individuals who are interested in providing small-dollar donations to help them along,” says Jeffrey W. Berkman, Of Counsel to SequelTech.
Companies who use crowdfunding sites to raise capital do not offer securities in return. Rather, they provide themed give-aways, credits on a movie, a chance to get a pre-release or free copy of the product, and the like.
From the start, crowdfunding sites have been viewed with suspicion and wariness by traditional securities brokers and salespeople. They clearly operate outside any framework of SEC regulations. However, in the current economic climate, many government officials see these sites as providing a much-needed service for companies that need to raise capital but can’t afford the sometimes staggering fees associated with registering a stock offering with the government or raising funds through the current framework of a private placement.
With the passage of the JOBS Act, the SEC was given authority over these unconventional funding services. A few broad guidelines were included in the legislation:
○ Businesses wishing to avail themselves of crowdfunding must not raise more than $1 million per year through the mechanism.
○ Crowdfunding sites will be required to be registered with a self-regulatory organization and regulated by the SEC.
○ There will be some sort of means test to insure investors are qualified in the sense that investors in other, more traditional, private placement offerings are qualified, albeit with perhaps fewer restrictions.
○ The firm behind the crowdfunding site must be a broker or can be a non-broker but it still must be registered with the SEC.
○ Significantly, crowdfunding will allow general advertising and solicitation to accredited investors in a non-registered offering, which is prohibited under securities law.
But the passage of the JOBS Act didn’t have the immediate effect of clarifying the rules and regulations which would govern crowdfunding. Rather, the JOBS Act placed the obligation on the SEC to adopt the required rules and regulations for implementation.
“Unfortunately, up to now the SEC has failed to enact the implementing rules and regulations governing crowdfunding,” SequelTech Founder and Managing Partner Melise Blakeslee points out. There is speculation as to why the outgoing SEC Chairman failed to act by the January 31, 2013 deadline. However, with the appointment of Mary Jo White as SEC Chairman, Berkman sees the dawning of a new era at the SEC. “Chairman White,” he says, “has a reputation for being tough and getting things done, so many observers who want to see crowdfunding clarified and properly regulated are expressing hope that the time may now come soon.”
It will soon be a year since the JOBS Act was signed into law. The crowdfunding industry has continued to grow and prosper. Thousands of companies, projects and non-profit organizations have received funding. But so long as the SEC fails to issue the needed regulations spelling out in detail the restrictions it will impose on these Websites, crowdfunding, which is hailed by many start-ups and emerging companies as a game-changing opportunity to raise funds, remains unavailable.
What does this mean if you’re interested in funding a product or project via a crowdfunding site? It means you’ll want your attorneys to keep a close eye on the SEC regulatory process so that you can make timely adjustments to your plans and fund-raising tactics as needed without losing out on the enormous potential of crowdfunding. “And if you’re thinking about starting a new business to get in on the ground floor of crowdfunding, you should pay close attention to the news about the forthcoming SEC regulations,” warns Blakeslee.
ABOUT SEQUEL TECHNOLOGY & IP LAW PLLC
Sequel Technology & IP Law (SequelTech) is a Washington, D.C.-based law firm specializing in intellectual property and high-technology law. Founded in 2009, the firm is headed by Managing Partner Melise Blakeslee. Melise Blakeslee and Jeffrey W. Berkman work together as "of counsel" on various business law, IP and high-technology law matters for clients in a variety of industries.
Disclaimer: The discussions in this Blog do not constitute legal advice nor create an attorney-client relationship. You are urged to seek the advise of an experienced lawyer who can provide counsel with respect to your corporate/business law matters.
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