Equity Crowdfunding: A Quick Primer for San Diego Startups
Equity crowdfunding can be a viable option to help San Diego and California businesses and entrepreneurs raise startup working capital. However, because equity crowdfunding involves the offering and sale of “securities,” anyone considering crowdfunding should make sure to get counsel from an experienced business San Diego business attorney.
What is Equity Crowdfunding?
Equity crowdfunding is somewhat newer than the more traditional crowdfunding that has been popular since the late 1990s. Old-school crowdfunding through websites like Kickstarter, Indiegogo, GoFundMe, etc., generally involved a business or person seeking donations or trying to pre-sell goods or services to raise the startup capital needed to get the business up and running.
By contrast, equity crowdfunding, sometimes called “investment crowdfunding”, generally involves a business seeking investments in the business (money), in exchange for shares or a subscription or some sort of ownership interest in the business OR in exchange for promise of a financial return. In either case, the investment is a passive investment — putting money at risk with an expectation of making money based on the work/effort of others. As such, equity crowdfunding subscriptions are “securities.” Thus, both federal and California securities laws are implemented.
San Diego Equity Crowdfunding: Complying With the Securities Laws
In general, the offering and sale of securities is regulated by the federal Securities and Exchange Commission (the “SEC”). To comply with securities laws and regulations, generally anyone or any business offering or selling securities must register the securities and provide a large quantity of information. As one might guess, registration is expensive.
Certain exceptions exist for small offerings and sales. In 2012, Congress passed the JOBS Act which, among other things, amended the securities laws to create an exception for equity crowdfunding. The SEC regulations promulgated pursuant to the JOBS Act went into effect in 2016. Thus, if you are considering starting an equity crowdfunding campaign, you will not be required to comply with the full registration process of a larger initial public offering. However, you must still comply with what is now known as Regulation Crowdfunding.
What is Regulation Crowdfunding?
To begin with, all equity crowdfunding must be done through registered broker-dealers or through registered “funding portals.” Broker-dealers are the same as normal securities broker-dealers that have been required under the securities laws for decades. Funding portals are websites that have registered with the SEC and help enforce Regulation Crowdfunding. Your San Diego equity crowdfunding campaign has the following basic limitations:
- Your campaign must be “all-or-none” — if you do not raise the entire amount solicited (that is, sell the total amount of subscriptions offered), then all investments must be returned
- Only $1,000,000 can be raised in any 12-month rolling period
- You may only communicate with investors through the funding portal or the broker-dealer
- Your investors are limited in the amount they can invest (in your campaign and others) — between $2,000 and $10,000 total per year
- Investors are limited in their ability to resell their subscription for one year
In addition, your San Diego equity crowdfunding campaign must make certain filings with the SEC, must comply with various accounting requirements concerning financial statements and disclosure documents, and must provide to investors various annual and periodic reports, updates and, notice of termination of the offering.
Criticism of Regulation Crowdfunding
In general, since its rollout in 2016, Regulation Crowdfunding has been deemed a success. However, already there are calls for eliminating some of the limitations. It is argued that $1,000,000 is simply too small. That limitation is woefully insufficient if the equity crowdfunding is needed for real estate investments, particularly in states like California. See Forbes Magazine article here.
San Diego Equity Crowdfunding: Contact San Diego Corporate Law
For further information on equity crowdfunding, private securities offerings/sales and other legal services for San Diego and California businesses, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience and dedication to provide all the legal services needed for private offerings, the sale/purchase of a business, and for mergers and acquisitions. Contact Mr. Leonard by using this form on the Firm’s website or by calling (858) 483-9200.