Crowdsourcing and crowdfunding
In the context of financing, crowdsourcing is the process of getting funding, usually online, for a project from a large number (or crowd) of people who typically each contribute small dollar amounts. With crowdsourcing platforms (such as Kickstarter), the entrepreneur will set a target for the dollar amount to be raised, the deadline by which it must be raised and any reward to the persons contributing to the project. Typically, the dollar amount to be raised must reach the targeted amount on or prior to the deadline or all funds raised must be returned to the people who contributed to the project. Crowdsourcing does not involve the issuance of shares of , convertible notes or other securities to those persons who contribute. Instead, they typically receive a copy of the product that their contribution helped fund or some other token of appreciation rather than a stake in the company.
"In contrast to an Internet service like Kickstarter, which
permits investors to invest funds in for the promise of goods or
services, Regulation , the final rules on equity
adopted by the Securities and Commission effective May 16, 2016, will
permit the purchase and sale of debt and/or equity securities. Unlike certain
other securities offering exemptions, such as Rule 506 of , there
are no restrictions under Regulation on by
unaccredited investors. As discussed below, however, Regulation
includes a number of provisions intended to protect investors who engage in
these transactions, including investment limits, required disclosures by
and a requirement to use regulated intermediaries.
Generally under Regulation , an may raise up to $1,000,000 in a 12-month period through crowdfunded offerings. An engaging in a crowdfunded offering must complete and file the newly-created Form C, which requires the public disclosure of certain business and financial information of the , including financial statements prepared in accordance with US GAAP. They will also be required to file reports updating the information contained in Form C annually, generally, until they become public, repurchase all securities issued pursuant to the exemption, or liquidate or dissolve.
An considering a crowdfunded offering will need to weigh the costs and benefits of compliance with the regulations, including whether it has available the required financial statements and, more importantly, whether it is willing to publicly disseminate those financial statements and other information about its financial condition and business mandated by Form C. The should work closely with its lawyers and accountants to understand the expected costs and associated with the initial filings and ongoing compliance with Regulation . In addition, the should consider the impact of having a large base early in its lifecycle, including the administrative costs and challenges associated with ."