February 2017 Bar Bulletin
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February 2017 Bar Bulletin

Securities-Based Crowdfunding Scorecard

By Eugenie D. Rivers

 

In 2014, proponents of broad-based, crowdfunded securities offerings were excited by the adoption of Title III of the JOBS Act. Title III allows businesses to raise up to $1 million in a 12-month period through the sale of securities to an unlimited number of non-accredited, small investors.

However, actually conducting any of these offerings was subject to the SEC adopting rules to implement Title III. After an agonizing two years, the SEC finally adopted its Title III crowdfunding rules (“Reg CF”), effective on May 16 last year. The SEC also adopted issuer guidance that gives a good overview of Reg CF.1

As client interest in conducting federal crowdfunding offerings increases, it’s useful to take a brief look at state crowdfunding offerings, and then to look at what has occurred in this new federal marketplace during the first few months under Reg CF.

State Crowdfunding Rules

While waiting on the SEC rules, more than half the states adopted rules permitting securities-based crowdfunding offerings to small investors residing solely within the issuer’s state, in reliance on the federal “intrastate” exemption from registration.2 These state crowdfunding rules vary widely in their requirements and have met with varying degrees of success in permitting securities-based crowdfunding offerings to get to market.

According to the North American Securities Administrators Association (NASAA), as of June 20, 2016, 179 state crowdfunding offerings had been filed, and 166 had been cleared/approved by state regulators.3 Unfortunately, Washington’s crowdfunding rules4 are among the most restrictive in the country. As of June, only one Washington crowdfunding offering had been approved after a two-year approval process.5

For federal Title III crowdfunded offerings, NASAA has issued a proposed model rule and draft uniform notice form to the states. In July, Washington substantially adopted those rules and the notice form.6

Reg CF Offering Activity

Through August 24, approximately 86 offerings had been filed with the SEC under Reg CF on the new Form C. WeFunder Portal (the most active Title III funding portal) reports that 24 of those offerings had met their minimum funding targets required to release the funds from escrow.7 Those funding targets ranged from a low of $27,612 to three offerings achieving the maximum $1 million. If you don’t count those three largest offerings, the average fully funded offering size was approximately $163,000.

The companies with successful funding include a number of brewery/spirits/coffee companies, several indie film outfits, several hospitality concerns, and a number of health/medical device firms. Of the fully funded offerings, 18 of the 24 were conducted through WeFunder.

Offering Platforms

One unique feature of Reg CF is its requirement that all offerings must be exclusively conducted through one online platform operated by a broker-
dealer or one of the new “funding portals” authorized by the JOBS Act. To date, 16 funding portals have registered with the SEC and FINRA.

These platforms charge fees based on a percentage of the offering amount, ranging from 3–10 percent, and several also receive 2–5 percent of the securities issued. These commissions add significant cost to conducting a federal crowdfunded offering.

A review of filed Form Cs, through August 24, estimates funding portal activity and commission rates as follows:


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