The word is now out – Title III equity crowdfunding under the JOBS Act is not going to work very well. The problem? It is going to be way too expensive. Estimates to do an equity raise pursuant to Title III range between $140,000-$250,000 for a million dollar raise.
See these two posts on this topic:
This is simply too steep for it to make any sense except for companies that have a business purpose other than just raising money to do such an offering (e.g., encouraging patronage by turning patrons into stockholders as well).
But here is something interesting to consider. Years ago state and federal securities regulators constructed something called a Small Company Offering Registration, or a SCOR. If you read the description of a SCOR offering on the Washington State Department of Financial Institution’s website (see here: http://www.dfi.wa.gov/sd/scor.htm), you will notice something somewhat remarkable: it looks even better than a Title III equity crowdfunding. Let me show you how they compare.
|Title III Crowdfunding||SCOR (“Small Company Offering Registration”)|
|Fund raise limit||$1M during any 12 months||$1M during any 12 months|
|Required to use an intermediary?||Yes (and look for a fee of about 8-10% of the gross proceeds to be paid to the intermediary).||No.|
|Advertisement allowed?||Yes, but subject to limitations.||Yes. But there are no specific advertising limitations as there are in the draft crowdfunding regulations.|
|Investor limitations||Yes; individual investor caps.||No. “Investors are not limited as to number or type, nor is there any restriction on the amount that may be sold to any one person.” See the following link: http://www.dfi.wa.gov/sd/scor.htm|
|Requirement of audited financials?||Yes, if raising more than $500,000.||No, if you only raise money from Washington residents.|
|Geographic availability||Not limited to specific states in which the issuer has gone through the registration process.||The geographic availability of a SCOR offering is limited to the states in which a company has gone through the registration process.|
Will the SCOR come back into popularity now that Title III equity crowdfunding has not turned out as crowdfunding advocates had hoped? It is possible. It will be fun to watch and see. But let’s be honest – there are problems with SCOR offerings, which is the reason they are not very popular. What problems am I referring to? In general just the complexity of an offering that requires you to either register securities with state securities regulators (like a SCOR offering), or go through a difficult and burdensome process (like that described in Title III of the JOBS Act).
The truth is—Congress needs to revisit the crowdfunding provisions of the JOBS Act and simplify those provisions substantially. I am afraid Title III crowdfunding is going to go the way of SCOR—it will be scarcely used, and ultimately forgotten.