Will May 1 change Equity Crowdfunding in the USA?

Posted on Posted in ECF

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Watching the Americans wrestle with Equity Crowdfunding is fascinating.

The nation that created Crowdfunding and has the world’s two major platforms in Kickstarter and Indiegogo, has  been caught flat footed dancing with its equity sister.

Well maybe not.

As anyone reading this blog will know, the evidence for ECf working in the medium let alone long term under the lite regulation the UK has used, is at best, very thin.

In the States, May 1st will at last see 4 years of wrangling over the JOBS Act introduce a system where ordinary US citizens can invest in non listed US companies.

Up till that date you had be to worth more than $1m to take part and filing restrictions have prohibited all but the largest ECf campaigns from being viable.

This is how the new regulation will look. The 12 month limit is the amount a citizen can invest in ECf.

Annual Income          Net worth          12 month Limit

30k                                      105k                        2k

150k                                     80k                         4k

150k                                   100k                        10k

200k                                   500k                        20k

1.2m                                    2m                         100k

You may need an accountant to help work out which bracket you are in! All figures in USD

New arrangements for the companies trying to raise funding using ECf have also been put in place. This is a system of tiered financial disclosure.  The minimum level of financial disclosure required by the company depends on the amount of money being raised or raised by the company in the prior 12 months:

  • $100,000 or less – financial statements and specific line items from income tax returns, both of which are certified by the principal executive officer of the company.
  • $100,000.01 to $500,000 – financial statements reviewed by an independent public accountant and the accountant’s review report.
  • $500,000.01 to $1 million – if first time crowdfunding, then financial statements reviewed by an independent public accountant and the accountant’s review report, otherwise financial statements audited by an independent public accountant and the accountant’s audit report.

People we have spoken to suggest that a company wanting to raise over $100k will have an upfront non recoverable cost of at least $15k to cover these regulatory requirements. And then there is no guarantee that the company will raise any money. Experience in the UK shows that the average amount being raised using ECf has been on the up since 2011 and now it is unusual to find many pitches below the $100k or equivalent level.

It does seem unlikely that this combination of regulations will help ECf take off in the US. But just maybe that is the idea. America has the unhelpful reputation of being the home of most of the world’s largest financial scams and the authorities are not about to open up the market to another.

The big question is who is right? Only time will tell.