Q. When can I start crowdfunding?
A. If you are an entrepreneur you need to wait until the SEC finishes its rule making process. At that point you will have to register your idea with a Crowdfunding website. Before you can raise any money they will run a background check on you. This will not be before the beginning of 2013.
If you are a Crowdfunding website you need to wait until the SEC finishes the rule-making process before your site goes live. Until the SEC is done with its work, the current system of raising capital with the current rules is in place and you CANNOT crowdfund money. You will NOT be able to put up an equity or debt crowdfunding website until the SEC is done with its work, which will be the beginning of 2013.
Q. Why is a SRO necessary?
A. Issuing a security without oversight is not only impossible but unacceptable. Imagine of there were no oversight, the fraud that would take place. Having an SRO oversee the process and intermediaries as a conduit is critically important to an efficient marketplace and investor confidence. In addition, the legislation mandates that all crowdfunding take place via registered intermediairies. These intermediaries have the option to register as a broker-dealer or a funding portal. The prior is regulated by FINRA and the later is an industry-driven SRO (CFIRA) focused on addressing those concerns most relevant to the industry.
Q. What will the SRO do?
A. Form a coalition of all CrowdFund Investing intermediaries, investors and entrepreneurs. Be a voice for this group in Washington, DC. Initially advocate for the industry during the 270 day rule-making process. Then continue to work with the SEC and represent the interests of the industry in Washington. Provide investor education so that investors understand the risks involved in crowdfunding. (Note: Donation-based crowdfunding platforms do not need to register under both the current law and proposed legislation).
Q. How can a start up raising B and C round financing over $1M apply and raise additional capital with crowdfunding for equity and what are the challenges?
A. Under the proposed legislation a company can crowdfund up to $1M/year. If a firm needs more than that, they need to go to the traditional sources for capital. Standard challenges (lack of credit, lack of capital, lack of interest, high interest rates, etc) would exits.
Q .Is Crowd Funding now going to earn lawyers and accountants more money? Is this not creating more red tape?
A. It’s no different then applying for a an SBA loan for example, where there are forms to fill out and documents to provide and some people need professional help and others can do it on their own. Part of the bill requires certified or audited financial statements based on how much money you want to raise. While there will be additional steps, the intent is to provide a transparent marketplace so that investors feel confident in crowdfunding businesses.
Q. This is going to create fraudulent cases. Anyone can list and take the money and run, what prevents this?
A. Following the tenants of crowdfunding it will be difficult to commit fraud. The principle of crowdfunding is localvesting where the investors are your friends and family. Taking advantage of people you know, that trust you and your relationship can happen but it will be rare. One should never invest in someone they don’t know or a product or service they don’t understand. This will be a critical part of the investor education component of CFIRA. In addition an entrepreneur will have hundreds of new investors that they will be accountable too, and they will be required to report their progress to them as well. Entrepreneurs will be required to register with and report every year to the SEC. This reporting will lead to transparency not only among investors but in the marketplace as well.
Q. How can I become a member of CfIRA and get involved?
A. A member is defined as “an entity or organization that, by payment of dues, affords itself one vote for the purposes of general membership elections and voting.” By definition of the by-laws, this would tend to only allow a “member”, whether this be an organization that has more than one employee participating in calls or a person who has more than one company, one vote, unless that member pays for multiple memberships. Since we do not yet charge for membership, one company receives one vote as a member entity.