Potential Pitfalls of Regulation CF – Part I: Practical Concerns for an Issuer – Crowdfund Insider


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.

Source: Potential Pitfalls of Regulation CF – Part I: Practical Concerns for an Issuer – Crowdfund Insider

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