Crowdfunding is a term used in many different contexts. The conversation surrounding crowdfunding encompasses diverse considerations and interests. In its broadest sense, crowdfunding is a technological fundraising medium for businesses, projects, or charitable causes. Instead of dealing with a financial institution or specific angel investors or venture capital funds, crowdfunded start-ups try to raise money from a worldwide "crowd." Some crowdfunding campaigns solicit donations and pre-orders, such as Kickstarter or Gofundme. Others sell securities. This Comment will only address the rules that apply to crowdfunding campaigns which offer securities.
Securities laws have two prime directives. First, companies can only offer and sell securities in a registered offering or in an offering that satisfies the requirements of an exemption from registration. Second, these businesses must not misstate material facts or omit material facts if the omission would make its other disclosures misleading to investors.
Primarily, the JOBS Act and other crowdfunding laws focus on the first prime directive. They create exemptions from registration that allow businesses to crowdfund, utilize general solicitation and, in some cases, offer and sell securities to non-accredited investors. These new exemptions present exciting and important changes that democratize the capital raising process by allowing new subsets of businesses to communicate with a broader investor base than ever before.
This Comment will briefly discuss these updated exemptions with a particular focus on Title II of the JOBS Act and the related SEC Rule 506(c), as well as Title IV of the JOBS Act and what some call Regulation A+. Both Rule 506 (c) and Regulation A+ are revolutionary because they change who may talk to investors and the technologies that may be used to reach them. The primary focus of this Comment is to discuss these securities laws' requirements for disclosures to investors in light of the brave new world crowdfunding offers. On their face, the updated exemptions change very little about what issuers must say to investors. The disclosure challenges posed by the updated exemptions affect new issuers who have little prior disclosure experience and may have very low compliance budgets. These challenges require such new issuers to comply with traditional securities disclosure rules when they are talking to a less sophisticated crowd of investors than ever before utilizing new technological platforms that are constantly evolving. This Comment discusses how and why an issuer taking advantage of these updated exemptions might inadvertently violate securities disclosure laws when the speaker changes, the audience changes, or the disclosure platform changes, and how to avoid potential traps these changes create when paired with newly available disclosure platforms.
Zachary James Wilson, Challenges to Crowdfunding Offering Disclosures: What Grade Will Your Offering Disclosure Get?, 38 Campbell L. Rev. 457 (2016).