TITLE III CROWDFUNDING
The concept of crowdfunding has been around for a few years. Sites such as Kickstarter and Gofundme harness the power of the Internet to enable people from all over the world to fund projects. However, these sites could only provide money for charitable purposes, or, for commercial solicitations, were limited to pre-funding the manufacturer or design of a product. These sites could not enable a company to go public. For example, one could contribute $100 towards a widget company with the agreement that contribute or would receive, in due course, one widget. The contributor had no ongoing interest as a shareholder or partner of the company in which funds have been placed.
A share of common stock, or membership interests in the limited liability company, is what is known as a ”security.” Basically, a “security” is an investment in a company in which the investor doesn’t have management control. Following the stock market crash of 1929, the Federal government passed a series of legislative acts which have regulated money raising (the selling of securities) together with the process of going public in the United States since the 1930s.
Under these laws, a security cannot be offered generally to the public unless it is reviewed through a regulatory process, called “registration.” That process is expensive and time-consuming. Under the same regulatory formwork, however, sales can be made privately, that is, without general solicitation or advertising, with much lower level requirements of time and expense.
In 1933, Congress never imagined that we would have the Internet and we would have crowdfunding. In order to harness the power of the Internet, for capital raising for small companies, Congress passed the Jumpstart Our Business Startups Act. Title III of the Act is known as the crowdfunding exemption, and authorized the Securities and Exchange Commission to issue regulations regarding its implementation. This regulation, called Regulation CF, is commonly referred to as the crowdfunding regulation.
Regulation CF provides limited relief to persons wishing to obtain funding from the public, which we will explain in subsequent posts.
