The New Crowdfunding Registration Exemption: Good Idea, Bad Execution

Title III of the JOBS Act, signed by President Obama on April 5, 2012, sets forth a new exemption from federal and state securities registration for so-called “crowdfunding” promotions. Crowdfunding is an increasingly popular form of raising capital through broad-based internet solicitation of donors. Many promotions simply seek charitable or other donations. But the lure of raising funds through the internet has also led to promotions for potentially profitable ventures that offer an economic return to donors. These efforts invoke the federal and state securities laws, as there are no de minimis standards protecting even the smallest of offerings. Registration exemptions under the 1933 Securities Act and those created by the Securities & Exchange Commission have not been useful for such small offerings and certainly cannot be used for internet-based offerings. In the face of SEC inaction with regard to such small-scale promotions, Congress took it upon itself to create a new exemption. Unfortunately, as described in this Essay, despite good intentions, the newly-created exemption is fraught with regulatory requirements that go beyond even existing exemptions and raise transaction costs and liability concerns that may substantially reduce the exemption’s utility for small capital-raising efforts