Investment Crowdfunding Requires an Attorney — with Long Securities Law Experience

Joseph R. Soraghan

By Joseph R. Soraghan



The entrepreneurial press, indeed, even the popular press, is abuzz about regulation crowdfunding (i.e., investment crowdfunding), which became legal on May 16, 2016.  And according to some advertisements (primarily by portals, the businesses which will provide the platforms for such crowdfunding), the fund-raising company does not need an attorney, although it would be “nice.”  Rather, they say, or imply, small and large businesses with their portals can simply get on the internet to quickly fund their ideas and better the economy at the same time!

Do not believe either the buzz or the advertisements.

Regulation CF is Only a Small (Albeit Very Important) Part of the Applicable Law

Regulation crowdfunding (17 CFR Parts 200,  et seq.)(“Reg. CF”) though it is a sea change from (some of) the rules governing entrepreneurial finance, it is not for everyone.  Indeed, for most entrepreneurs it should be considered as a last resort only.  (See, for example, “Regulation Crowdfunding; Is it Right for You?”, St. Louis Small Business Monthly, June 2016, p. 29.)  Secondly, Reg. CF adds to the rules and required steps for legally raising capital , and thus creates even more of a need for the assistance of a lawyer.

That is, the only (albeit very important) change in the law is that now certain “general solicitation” is allowed to promote certain types offerings of securities.  But not all general solicitation is allowed.  (For example, much information which could be promulgated other than on the platform of a portal such as by newspaper or television is still illegal.)

Virtually all other regulations, statutes, laws – and judicial lore – applicable to raising capital prior to Reg. CF remain applicable and will be applied by securities regulators – and by attorneys for investors who lose money in their crowdfunded investments. The securities regulators, which have authority to prosecute suspicious offerings,  have been opposed to and wary of investment crowdfunding since it was required by the JOBS Act in 2012, including Missouri (see, for example, “Kander Issues Investor Alert on Crowdfunding.”)

With the exception of allowing (limited) general solicitation, all the law (and the lore of the regulators and courts which developed since the Securities Act of 1933) still applies to all offerings, including crowdfunded offerings.  So do the complicated rules and methods. For example: Continue reading »

Investment Crowdfunding Will Be Legal But Will It Be an Improvement?

Joseph R. Soraghan

By Joseph R. Soraghan



In the JOBS Act adopted in April 2012, Congress required the Securities and Exchange Commission (“SEC”) to adopt rules legalizing (i.e., exempting from the requirement to register with the SEC) the offer and sale of securities by small business issuers (which cannot afford registered public offerings) using mass media, to-wit: the Internet, social media, etc. Historically, both state and federal exemptions required “privateness” and forbade “general solicitation.”

On October 30, 2015, the SEC, in a 686 page release, finally adopted rules (see pages 547-686) to allow investment crowdfunding (the use of mass media to make offers and sales to non-accredited investors, i.e., persons with less than $1 million net worth and incomes under $200,000 annually). The rules will become effective in April 2016.

Supporters argue that these rules simply bring the offering and sales of securities into the modern age of mass media and allow persons of limited means to participate in the great boom of entrepreneurship. Critics, on the other hand, point out that those are the very persons who are the least investment sophisticated and the most vulnerable to financial fraud.

What Was Available Before Investment Crowdfunding?

Continue reading »

Regulation Crowdfunding: Is It Right for You?

Joseph R. Soraghan

By Joseph R. Soraghan



To much ballyhoo, on October 30, 2015, the Securities and Exchange Commission (“SEC”) finally adopted rules to allow investment crowdfunding (which the SEC calls “Regulation Crowdfunding”). That is, it allows the use of mass media (Internet, etc.) (called “general solicitation”) to make offers and sales to non-accredited investors. Those are persons with less than $1 million net worth and annual incomes under $200,000. (Under present rules, general solicitation may be used only to solicit purchases from “accredited” investors.) The new rules will not become effective before April 2016.

“Regulation Crowdfunding”: A Method for True Investment Crowdfunding

Conceptually, allowance of general solicitation to solicit non-accredited investors is a sea change, in direct conflict with the basic investor protection philosophy of the SEC and state regulators since adoption of the Securities Act of 1933. The actual benefit of the new rules, however, is in some doubt. Continue reading »

SEC Finally Proposes Rules to Allow Crowdfunding

Joseph R. Soraghan

By Joseph R. Soraghan



Not quite ten months late, the Securities and Exchange Commission (SEC) on October 23, 2013 proposed rules to allow entrepreneurs and other small businesses to advertise investments in their companies on the Internet and in other general venues, and to allow persons other than wealthy investors to purchase those investments. Congress, in the JOBS Act signed by President Obama on April 5, 2013, had told the SEC to propose such rules by December 31, 2012. (In fairness, the SEC was faced with great pressures from numerous quarters, including the legislators themselves, concerning the content of the rules, which made that deadline impossible to meet.)

This type of investing, called “investment crowdfunding,” was illegal, and will remain illegal until the process of review, amendment and adoption of final rules is complete. The SEC has asked the public for comment on the proposed rules within 90 days. At least a few months of further processing after that 90 day period will be required before the rules are final. Continue reading »