Silicon Valley Debates the Do’s and Don’ts of Equity Crowdfunding

9/26/12Follow @Tansey_Xconomy

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some preliminary information about the requirements for funding portals. They’ll have to register with the SEC and become members of a national securities association such as the Financial Industry Regulatory Authority (FINRA). They’ll also have to take steps to protect investors’ privacy and to reduce the risk of fraud.

Indiegogo’s Rubin says he couldn’t predict the design of his equity crowdfunding portal, or the timeline for its launch, until the final SEC rules come out.

Will selling shares yield higher capital returns for startups than the current crowdfunding model that offers incentives like T-shirts to contributors? Rubin says that’s also hard to foresee, but will likely depend on each company’s unique circumstances.

“It could be that some people will be excited just to buy $20 (share) units,” he says.

Orrick attorney Kane says startups need to be aware that state securities regulators will be scrutinizing crowdfunded share offerings for false statements, downplayed risks, and other violations of federal or state rules governing stock issues.

“If anybody raises money from anybody else without a lawyer, it’s really foolish,” Kane says.

Many emerging companies are concerned about their eventual chances of attracting venture capital if they already have a collection of private shareholders whose rights would have to be considered in a new financing deal.

Kane says VC’s will look carefully at the ownership structure, but won’t turn their backs on a successful young company.

“Would a VC not invest in Facebook because it had been crowdfunded?” he asks.

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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  • http://www.facebook.com/wmcunningham William Michael Cunningham

    It will take time for procedures to develop, but crowdfunding is better than the alternative of waiting on some bank or VC firm to fund your vision. The article is another indication of the disruptive nature of crowdfunding. I write about this in my new book on Crowdfunding. See: http://www.facebook.com/CrowdfundingBook

  • Chuck Scifers

    Having experience with funding from VC’s I see Crowdfunding as a welcome relief from those exploiters. I hope that they are squirming in their seats, thinking that they may have to play more fair with their clients…and compete with this disrupting new funding vehicle. Power to the People!

    Chuck Scifers
    chucks@gmail.com