Crowdfunding

COMMERICAL TRANSACTIONS rowdfunding is the practice of fund- In Stuart Dredge’s article, “Kickstarter’s Biggest ing a project or venture by raising Hits - Why Crowdfunding Now Sets The Trends” monetary contributions from a large published in the Guardian in April 2014, he shows number of people, typically via the In- examples of successful crowdfunding campaigns, Cternet. According to “Crowdfunding: Transform- including the Flint and Tinder company’s hooded ing Customers Into Investors Through Innovative sweatshirt project ($1.1 million raised in 2013) Service Platforms,” The crowdfunding model is and the Kano technology’s coding kit develop- fueled by three types of actors: the project initiator ment ($1.5 million raised in 2013). However, issu- who proposes the idea to be funded; individuals ers should also be aware that crowdfunding may or groups who support the idea; and a moderating expose them to intellectual property issues, hostile organization (the platform) that brings the parties takeovers, securities fraud allegations and reputa- together to launch the idea. tions, among other potential litigation concerns. Primarily there are three types of crowdfund- The CROWDFUND Act authorizes “crowd- ing reward/donation-based, equity-based and funding of securities,” defined as the sale of unreg- credit-based. Under the frame of reward-based istered securities over the Internet to large num- Crowdfunding: crowdfunding, entrepreneurs presell a product or bers of retail investors, each of whom only invests service to launch a concept, to individuals who a small dollar amount. (See Jumpstart Our Busi- The New Way receive some type of incentive in return, such as ness Startups Act, Pub. L. No. 112-106 §§ 301-05. ) a free application. Equity-based crowdfunding The primary goal of the CROWDFUND Act to Finance is the collective effort of individuals to support is to provide a less expensive means for startup other people’s initiatives through equity. Credit- companies to raise capital by establishing a new Your Startup based crowdfunding has gained its popularity exemption to the securities registration require- since 2012 as banks reduced their level of lend- By Chris Parrington ments in the Securities Act of 1933. To crowdfund ing activities. A pool of investors lends capital to securities legally, issuers may not raise more than a borrower who meets the credit terms in credit- $1 million annually via crowdfunding while inves- based crowdfunding. tors’ annual aggregate amount of crowdfunding Crowdfunding has come a long way since 2008, investment is limited on a sliding scale. (Andrew when a group of U. C. Berkeley MBA students A. Schwartz, Crowdfunding Securities, 88 Notre launched Indiegogo. It’s now a multibillion-dollar Dame L. Rev. 1457, 1462 (2013)). industry growing exponentially every day. Accord- Moreover, crowdfunding transactions must ing to David Drake’s Article “U.S. Leads World in be executed via a financial intermediary, such as Burgeoning Crowdfunding Trend” published in a broker-dealer or a funding portal. Id. To facili- Forbes magazine in April 2013, $1.6 billion were tate crowdfunding, several states pass their own raised in North America through crowdfunding crowdfunding exemption law regarding intrastate in the year of 2012. For example, LendingClub, a offerings, such as Wisconsin, Kansas, Georgia and credit-based crowdfunding platform, transacted Michigan. However, the method by which capital $125 million in March 2013 with projections to is raised through crowdfunding must still comply lend up to $1.5 billion by the end of the year. with securities laws, thereby still leaving the door According to Statista.com’s report, “Estimated open to a flood of securities fraud allegations if the Volume of Funds Raised by Crowdfunding Plat- crowdfunding investments ultimately fail. forms Worldwide Between 2011 and 2013,” the Crowdfunding Industry Report estimates that 72 percent of crowdfunding will stem from the United States. In Richard Swart’s article, “World Bank: Crowdfunding Investment Market to Hit Chris P. Parrington chairs the $93 Billion by 2025” published by MEDIASHIFT, national securities practice group at Foley & Mansfield. reports estimate that the crowdfunding market is Representing businesses, expected to hit $93 billion by 2025. broker/dealers, registered Crowdfunding campaigns provide issuers or representatives and fund producers with social and financial benefits. A managers, his practice centers compelling project can raise public awareness of on matters involving FINRA the issuer via a crowdfunding campaign and indi- arbitration and securities rectly provide a powerful marketing tool. Crowd- litigation, and other complex funding campaigns create forums where audience business and commercial matters. Chris can be reached and potential investors can interact with project at cparrington@foleymansfield. producers. Financially, crowdfunding costs less com. Visit foleymansfield.com than traditional financing because the entire cam- for additional information. paign takes place on the Internet..

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