Up until very recently, crowd funding for actual shares of a company was not a reality. In other words, you can go to these crowd funding websites like Kickstarter. You can pledge money, and that money will go towards funding a development of a product. What do you get out of that pledge? You basically get the finished product. This is great for funding artists who want to create a movie or want to create music. This is also good for certain types of software. However, if you are looking to use crowd funding to actually fund a startup company, you are out of luck. Up until very recently, you cannot sell securities through a crowd funding platform. Well, that all changed with 2012′s jobs act. The US Congress passed a law that allows crowd funding for equity shares in startup companies. Of course, the usual skeptics started doubting the program because they see this as opening the flood gates to all sorts of equity scams. Scams are never gonna go away. There will always be people that will try to game the system. They will always use rules and laws in such a way that to crank out garbage product and suck up investors’ hard-earned money. With that said, the law has some safeguards that should enable the securities and exchange commission to come up with a framework that would make crowd funding for equity not just a viable reality but a practical one. Well, the regulations have been released and while on the whole they are great, there are certain issues that need to be addressed. There are certain flaws in the rules and regulations that might make crowd sourcing dead on arrival. People who are advocates of crowd sourcing say that these certain issues need to be addressed by the SEC for crowd funding to truly create the results that it was legislated to create. These four issues are risk acknowledgment. In other words, there has to be a mechanism where would-be investors acknowledged that they are entering to risky investments. They can’t just turn around and sue the company and the crowd sourcing platform. Moreover, a key part of making this happen is to help the crowd sourcing platforms pick and choose which funding opportunities to present. In other words, if they are gonna be liable for running such a platform, give them the power to minimize their legal exposure by picking and choosing investment opportunities that would decrease such legal exposure. Another key issue in the rules and regulations that people have a problem with is that there is no safe harbor provision. In other words, the rules and regulations work on a take it or leave it or all or nothing principle. In short, if a company is listed, they basically are listed and the legal process starts. The reality on investment is that there are certain ideas that are not ready for prime time. It may be a waste of everybody’s time to list this company and let it live out its life when there is not enough investor interest or there are just too many holes in the overall business proposition.
One of the rules and regulations by the SEC require that the company putting itself up for investment purposes needs a CPA audit. This can cost quite a bit of money. The main reason these startups are putting themselves up for crowd funding is that they don’t have money. So this creates a catch-22 situation, and a lot of critics are saying that this provision should be modified in such a way as to reduce the initial cost of companies putting themselves up for crowd funding.