Crowdfund, crowdfunding, finance, entrepreneurship, Issuer, law, regulation, decision-making, capital
Crowdfunding is an alternative for Issuers seeking funds for their businesses. On October 2015, the Securities Exchange Commission (SEC) released final crowdfunding regulations that became effective May 20162 as a charge of the Jobs Act, Title III (the “Crowdfund Act”). Issuers can now secure crowdfunded investments without a securities registration.
This article evaluates investment-based crowdfunding from the perspective of one group that has been neglected from the crowdfunding scholarship — Issuers that seek financing under this new framework. In Section I, the author summarizes the new crowdfund regulations, which create a new financing opportunity vastly different from previous types of debt, reward and gift crowdfunding. In Section II, the author sets forth a hypothetical Issuer case scenario, of a manufacturing business seeking $700,000 in investment financing for its business growth and hiring needs.This article does not focus on lifestyle and small startup decision-making in the context of investment crowdfunding, but rather focuses on higher-growth business, which is the target of the legislation. Additional research is suggested to address the small enterprise capacity needed to comply with the regulations, pay the costs and sustain the liability risk of an investment crowdfundingcampaign. In Section III, the author details financing alternatives to raise money, compliance costs, flow-through costs from intermediaries and costs needed to limit liability stemming from the transaction. The author develops a rubric to compare and contrast the financing alternatives. Next in Section IV, the author illustrates how an Issuer might arrive at a decision, weighing the risks, rewards, pros and cons, for the best funding vehicle available. Last, in Section V, the author contends that financing through this crowdfunding platform will be one of the most expensive ways for an Issuer to obtain capital.
Lee, Patricia Hureston, Access to Capital or Just More Blues? Issuer Decision-Making Post SEC Crowdfunding Regulation. Transactions: The Tennessee Journal of Business Law, Vol.18, 2016, pp. 19-79. (18 Transactions: Tenn. J. Bus. L. 19 (2016)).