Canadian Bar Association - National Magazine | Yves Faguy | October 30, 2013

A week after the SEC proposed rules to govern crowdfunding, Brian Korn at Pepper Hamilton LLP worries instead about the startups themselves:

The proposed rules are extremely impractical because of the restrictions and procedural hurdles a crowdfunding issuer, investor and funding portal will have to endure to raise capital. Compared to other forms of crowdfunding and capital raising, equity crowdfunding to the public has the worst “bang for your buck” in all of corporate finance.

One might expect that many of the investable start-ups who do not seek or obtain venture capital financing will resort to crowdfunding to accredited investors – which are generally people with at least $200,000 of gross income per year–$300,000 for a married couple or $1 million net worth. Web sites are already lined up to facilitate this process. Another provision of the JOBS Act that went into effect Sept. 23 enables advertising and “general solicitation” of accredited investor transactions.

Let’s not forget costs, too. To produce an offering disclosure document, enlist a funding portal, run background checks and file an annual report with the SEC year after year might well cost upwards of $100,000. The high expenses compared to the low maximum amounts that can be raised by a company and invested by an individual make public equity crowdfunding one of the costliest forms of (legal) capital raising.

Steven M. Davidoff wonders whether the trend will thrive or turn out to be a complete disaster...

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