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Equity Crowdfunding is “No Fund”


I recently received a question about the use of equity crowdfunding to create an investment pool that would create a small investment fund to purchase equity and debt securities in other small businesses. In short, the answer is that it is not allowed.

While equity crowdfunding provisions in the JOBS Act does provide easier access to investor funds by modifying the Securities Act of 1933, equity crowdfunding does not modify the Investment Company Act of 1940. The Investment Company Act of 1940 requires investment companies to register under the Act unless exempted from registration. The most frequently used exemptions are found in Section 3(c)(1) allowing exemption for investment companies with less than 100 beneficial owners and Section 3(c)(7) providing exemption for qualified investors having $5 million or more in investment assets.

Even if an exemption exists, the JOBS Act states, “Section 4(6) shall not apply to transactions involving the offer or sale of securities by any issuer that…is an investment company, as defined in section 3 of the Investment Company Act of 1940 or is excluded from the definition of investment company by sections 3(b) or 3(c).”

While accumulating the investments of crowdfunders by equity crowdfunding, a mini hedge fund might in theory be profitable for the organizer (and presumably the investors as well), but it is illegal.

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