Crowdfunding Offers Attractive Alternative But SEC Must Give More Clarity

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Crowdfunding emerged in 2005, allowing enterpreneurs to solicit capital from anyone with internet access. The model has since exploded, but not without some obstacles. Because some types of crowdfunding promise or offer a financial return on the investment, the purchase and sale of securities are involved and the activity falls under the enforcement jurisdiction of the SEC. In June 2011, the SEC took enforcement action to stop a $300MM crowdfunding effort involving the Pabst Brewing Company, which was eventually resolved with a cease-and-desist order. The JOBS Act signed by President Obama in April 2012 permits start-ups to raise capital through crowdfunding, utilizing an exemption from the registration requirements of the Securities Act of 1933. Crowdfunding is the subject of this article, which discusses the three general models of crowdfunding – the donation model, the reward model, and the investment model. The authors focus carefully on the investment model, outlining its principal benefits and potential drawbacks, including on the drawback side, the potential for investor lawsuits resulting from failed business ventures. The JOBS Act’s Title III, the Crowdfund Act, and its particular disclosure requirements are discussed in a handy list format. The Crowdfund Act requires the SEC to adopt implementing regulations by December 31, 2012.

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