When SEC Commissioner Piwowar lodged his controversial “NO” vote for the final rules implementing Title III Regulation CF last October, he did so with concern that the overcomplicated rules were laden with “traps” that could snare an unassuming company trying to raise funds. Unfortunately, he was right and upon deep analysis of the new regulations, I have found several issues and potential pitfalls, of which the average small business owner or potential funding portal may not be aware. In my tireless effort to “make crowdfunding work” I have embarked on this two part series to highlight these issues and elucidate them, before they ensnare the unwitting entrepreneur. This first part addresses issuers or those seeking funds through a crowdfunding. Part two will address issues faced by funding portals attempting to facilitate crowdfunding transactions. Investment Limits For individuals with a net worth or annual income below $100,000, the investment cap is the greater of $2,000 or 5% of the lesser of your net worth or annual income. The annual income and net worth can be combined with one’s spouse – but collectively the spouses can only contribute the maximum amount for an individual. The number of people, including highly trained and experienced securities attorneys, that get this wrong is staggering, and why not? This is a complicated formula with multiple disjunctive clauses that really only differentiates between people making between $40,000 and $100,000 a year or with a net worth in that band – so a scale of investment from $2,000 to $5,000. Do we really need all this complexity and potential for violation to prevent people from investing $3,000? Also, it doesn’t account for the expenses of those individuals. A single professional living alone certainly has a different amount of expendable income than a mother of four, but that is not accounted for. It also doesn’t account for one-time pay increases due to a bonus or other events. Since this cap is ultimately arbitrary, why not at least make it simple to understand and easy to administer like a flat cap of $5,000? Then we do not have to worry about unwary issuers or platforms who take investments from people who lie about their income/net worth, inaccurately calculate their income or net worth (how do you even calculate this – is it at time of investment decision or time of close, assets netted against only liabilities that come due in the current year?) or simply don’t understand the rule because of its complexity. Regardless, hopefully we get some clarity on these issues or develop an industry standard for the calculation of these amounts to provide some comfort when accepting investments.
The crowdfunding prep work program helps entrepreneurs, startups and small businesses amass a large crowd of followers on social media and utilizes PR to generate hundreds of articles on leading newspapers, TV/radio stations, trade publications and leading blogs By Robert Hoskins Austin, Texas (May 16, 2016) – Want to learn how to launch a successful Title III crowdfunding campaign […]
If you use your PayPal account to support a crowdfunding campaign, you can’t rely on its Purchase Protection plan anymore. The payment platform has announced that after June 25, payments made on crowdfunding platforms will no longer be eligible for the program, which allows users to open disputes for items that don’t arrive or are different from described. Supporting any crowdfunding campaign comes with a degree with a risk because you have to trust that your money will actually be used for the stated purpose, whether it’s helping someone reach a goal or supporting the development of a new product. In an emailed statement, PayPal said: In Australia, Brazil, Canada, Japan, United States and other countries, we have excluded payments made to crowdfunding campaigns from our buyer protection programs. This is consistent with the risks and uncertainties involved in contributing to crowdfunding campaigns, which do not guarantee a return for the investment made in these types of campaigns. We work with our crowdfunding platform partners to encourage fundraisers to communicate the risks involved in investing in their campaign to donors. According to a report released last year by Kickstarter, one of the biggest crowdfunding platforms, nine percent of successfully funded projects fail to deliver rewards, but 65 percent of backers surveyed said their rewards were delivered on time.
Bitcoin, the new age currency making rounds around the internet relies upon people, who are part of the network to keep it alive. In other words, the crowd keeps these cryptocurrency protocols alive by contributing processing power to the network (miners) and by executing digital currency transactions. Apart from being dependent on the crowd for its own survival, bitcoin and its underlying blockchain technology have something more up their sleeves, making them invaluable for the crowdfunding industry. The blockchain technology is a perfect fit for crowdfunding applications. The decentralized nature of the digital currency technology combined with security and immutability makes it so. The main application of blockchain technology, when it was introduced along with bitcoin by Satoshi Nakamoto was for it to be the distributed ledger that facilitates and records each and every transaction that ever happens on the Bitcoin network. By maintaining a record of all the transactions, the blockchain prevents users from double spending their bitcoins during the confirmation phase. However, the benefits offered by blockchain technology is much beyond its use as a ledger for digital currency transactions. To list few of the benefits, Blockchain technology offers a secure platform for data storage and management, it offers universal authentication, it builds a trust factor on trust-less networks, it can be used to automate various processes, easy to audit, offers frictionless transaction capability and it offers a certain degree of anonymity. Having such a long list of benefits under its belt, Blockchain technology has grown beyond bitcoin and its use is being explored by virtually every industry.