Crowdfunding: When Will the Rules Be Done?

Crowdfunding RulesThe startup community is getting excited and antsy.  The comment period on the SEC’s crowdfunding rules ended February 3.  The speculation has begun – when will the rules be final?  Could it be this summer?

My answer:  Who knows!

But to help us make some guesses, I have put together the below table.  The way I see it, we have two recent rule making projects from the SEC that provide us some guidance:  the bad actor rules and the rules repealing the ban on general solicitation.  Based on how long it took the SEC to issue the final rules in these two recent instances, I don’t think we are going to see final crowdfunding rules until late this year.  My guess: December 2014 or even early next year.

Crowdfunding Timeline Chart

(1) In the proposed rules, the SEC said that it was issuing them in light of comments received “and the magnitude of the change that the elimination of the prohibition against general solicitation represents to the Rule 506 market.”

Of course, I hope I am wrong and we see the final rules sooner.

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M&A Cage Match

This should be fun. If you are interested in attending this event, you can sign up here:

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Is the QSB Stock Tax Exclusion Even Worth It?

QSB stock tax exclusion1In the throes of the end of last year, when people were trying to figure out whether to incorporate a C Corporation before year end to try to set themselves up to qualify for the Section 1202, qualified small business stock 100% exclusion from tax benefit (subject to a $10M cap), I heard the following claim made:

“You can only exclude 10x your basis in your stock. Thus, if you are a founder, and your basis in your stock is very, very low–the exclusion isn’t worth much.”

If the above statement was true, the Section 1202 exclusion for qualified small business stock would indeed not be much of a benefit for founders, who typically don’t have a large cost basis in their shares.

Most founders might pay just a few thousand dollars for their founder shares. If a founder paid $2,000 for his or her shares, and the most they could exclude from tax was 10x that, the exclusion would only shelter potentially up to $20,000 in income from tax.

If you could only exclude 10x your basis in your shares from tax, Section 1202 would indeed be a meager prize.

But is the above statement true?


Section 1202 reads as follows:

(b) Per-issuer limitation on taxpayer’s eligible gain

(1) In general

If the taxpayer has eligible gain for the taxable year from 1 or more dispositions of stock issued by any corporation, the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account under subsection (a) for the taxable year shall not exceed the greater of—

(A) $10,000,000 reduced by the aggregate amount of eligible gain taken into account by the taxpayer under subsection (a) for prior taxable years and attributable to dispositions of stock issued by such corporation, or

(B) 10 times the aggregate adjusted bases of qualified small business stock issued by such corporation and disposed of by the taxpayer during the taxable year.

For purposes of subparagraph (B), the adjusted basis of any stock shall be determined without regard to any addition to basis after the date on which such stock was originally issued.

Thus, you get the greater of 10x or $10M. Rest assured founders, the benefit is ample if you qualify.


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Crowdfunding v. SCOR

Crowdfunding v SCORThe 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:

Crowdsourcing a Title III Crowdfunding Cost Model

“Death by Expense” of Crowdfunding?

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:, 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:
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.

Posted in Federal Law & Regulation, Financings | Tagged , , , , , , | 9 Comments

Event: Growth and Exit Strategies for Software and IT Companies

Growth and Exit Strategies for Software and IT Companies

Growth and Exit Strategies for Software and IT Companies Conference

The World Financial Symposiums is bringing together executives and investors in software, IT, Internet, mobile and related technology companies to speak to developing and expanding organization leaders. You’ll hear from major buyers, private equity investors, venture capitalists, angel investors, analysts and CEOs who have recently sold. This is also a great opportunity to network and interact with some of the top names in Seattle’s tech and finance communities.


Brian David Johnson

    Futurist & Principal Engineer – Intel Corporation

Klaus Schauser

    Chief Strategist and Founder – SecureDocs

Nat Burgess

    President – Corum Group Ltd.

Chris DeVore

    General Partner – Founder’s Co-op

Geoff Entress

    Vice Chairman – Alliance of Angels

Diane Fraiman

    Venture Partner – Voyager Capital

Craig Husa

    CEO – 3TIER sold to Vaisala

Len Jordan

    Managing Director – Madrona Venture Group

Gerry Langeler

    Managing Director – OVP Venture Partners

Wade Pfeiffer

    President – Safeharbor Knowledge Solutions acquired by Enghouse Interactive

Matthew J. Schiltz

    President and CEO – Tier 3 acquired by CenturyLink

Ward Carter

    Chairman – Corum Group Ltd.

Joseph M. Wallin

    Partner – Davis Wright Tremaine

Rob Schram

    Senior Vice President – Corum Group Ltd.

Gary Beyer

    Director – Corum Group Ltd.

Curt Ohland

    Director Corporate Development – Boeing

Christine Feng

    Corporate Development – Microsoft Corporation

Register Here


    Wednesday, January 29th, 2014
    Begin 8am – All Day


    Davis Wright Tremaine
    1201 Third Avenue Suite 2200
    Seattle, WA 98101

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