Three Curveballs of Public Equity Crowdfunding

By: Marianne Hudson, ACA Executive Director

This post originally appeared on

On May 16 when new “Regulation Crowdfunding” took effect, all American citizens received a gift that angel investors have enjoyed for years—they can buy stock in startups. But behind all of the excitement are a few surprises both investors and the companies raising money might not realize. These curveballs may mean that equity crowdfunding, won’t deliver the financial impact that Congress intended for startups when it passed the JOBS Act four years ago. 

Here are a few curveballs many angels and others in the startup community need to know:

The “crowd” doesn’t mean fully public.  It turns out Regulation Crowdfunding restricts what entrepreneurs can say about their securities offerings to the general public.  The bottom line? The offering details can only be on the one approved crowdfunding platform they choose. Additionally, those details must only be in the password-protected part of the platform.  Why is this a big deal? It nullifies one of the biggest reasons that entrepreneurs are successful in rewards-based crowdfunding like. Kickstarter and Indiegogo, where strong promotional plans with layers of details are provided and uses to communicate fundraising efforts to friends, family and anyone else in the public who might be interested.

With equity crowdfunding entrepreneurs can include very general information about their fundraising on their websites and in social media, but will need to connect readers to their chosen intermediary platform for offering details. With one exception, I haven’t seen anything in the media that underscores this important point for entrepreneurs.  And angels interested in these crowdfunding offerings need to know about it to ensure they ask the right questions in due diligence on investment opportunities.

Here is the SEC’s precise language in the rule:  “Under the final rules, an advertising notice that includes the terms of the offering can include no more than: (1) a statement that the issuer is conducting an offering, the name of the intermediary through which the offering is being conducted and a link directing the investor to the intermediary’s platform; (2) the terms of the offering; and (3) factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number and website of the issuer, the e-mail address of a representative of the issuer and a brief description of the business of the issuer. Consistent with the proposal, the final rules define “terms of the offering” to include: (1) the amount of securities offered; (2) the nature of the securities; (3) the price of the securities; and (4) the closing date of the offering period.543”  (Yes, that is footnote #543 – there are more than three times that many footnotes in the complicated rules.)

Investors – even accredited investors – are limited in how much they can invest.  Check out the SEC’s well-written bulletin for investors from earlier this year, and you’ll see a chart that shows a sliding scale of how much investors can put into equity crowdfunding offerings in a 12-month period.   Those with lower incomes or net worth are well protected by being limited to a total of $2,000 in equity crowdfunding offerings each year.  But accredited investors are also limited annually. For instance, a person with an annual income of $1.2 million or a net worth of $2 million would be able to invest a maximum of $100,000 yearly in equity crowdfunding offerings.   No doubt investors need to think through the right amount to invest in early stage companies annually, but this adds restrictions that are not in Regulation D offerings (typically angel investments) that startups should consider.

Crowdfunding rules are expensive and require disclosures that are competitively sensitive.  As Christopher Mirabile, chairman of the Angel Capital Association recently explained, companies relying on the rules are subject to very hefty disclosure requirements, and many involve competitively sensitive and/or confidential details. The offering disclosures must be made 21 days prior to any offering and be updated until there are no remaining crowdfunding shareholders in the company. In other words, indefinitely, unless the shareholders are bought out or the company is acquired. Required disclosure areas include:

  • The pre-money valuation, target size of the raise, the maximum size of the raise, and the target close date
  • Detailed financials which must be certified by the executives if the raise is less than $500K, and reviewed by an external auditor if raise is more than $500K
  • Management's discussion of financial condition of company
  • Management's discussion of the business, its plans, and the anticipated use of proceeds
  • Details on officers, directors and 20% shareholders
  • Disclosure of related party transactions.

In addition, to continually having to update offering disclosures, a company must also use a professional third party registered stock transfer agent and maintain associated records. Keep in mind that existing rules also require a company to t become a "public" reporting company under the Securities Exchange Act of 1934 once they have 500 or more investors.

I want to be excited about the potential opportunities of equity crowdfunding.  Sadly, my enthusiasm is tempered because it appears the rules for the American market have some built-in disadvantages for entrepreneurs and accredited investors.  For now, my job as the director of the world’s largest association of accredited angel investors, is to make sure as many interested parties understand what the rules are and what they mean, so they can be informed participators (or understand why it may not be the right market for them.)  You can be assured I’ll do that at the 2016 ACA Summit where hundreds of angels will better understand what the SEC rules actually are and what they mean to their potential investments and portfolio companies. Stay tuned.