There has been a lot of talk recently about a phenomenon called crowdfunding, a new type of fundraising that relies on social media and the Internet to raise small amounts of capital from large numbers of individuals. Despite the talk, crowdfunding remains impermissible under the securities laws absent a costly registration with the SEC and with state securities administrators. Last year, two people created a website, a Facebook page, and a Twitter account to solicit funds to be used to purchase Pabst Brewing Company. They received over $200 million in pledges from more than five million individuals, but were later subjected to cease-and-desist proceedings initiated by the SEC. Crowdfunding would seem to be a viable approach to small company capital formation, if only it were legal.

Today, most emerging growth companies wishing to raise capital without SEC registration limit their offerings to accredited investors and refrain from public solicitation and advertising. The SEC currently defines the term accredited investor, generally, to include numerous types of institutional investors and individuals with a net worth, exclusive of home, of at least $1 million or an annual income of at least $200,000 or $300,000 if the income of a spouse is included. By structuring their offerings in this way, companies are able to come within the exemption from the registration requirements of the federal Securities Act of 1933 provided by the SEC’s Rule 506. As a result of the National Securities Market Improvement Act of 1996 (NSMIA), reliance on Rule 506 also exempts an offering from the registration and qualification requirements of state securities laws, the so-called blue sky laws.