2,355 crowdsourcing and crowdfunding sites
Editor's Note: The following is an editorial from one of our contributing experts, Seattle attorney William Carleton. Carleton also writes about crowdfunding and other topics related to startups on his blog, Counselor @ Law.
A funny thing happened on the way to the US House of Representatives approving - for the second time - the crowdfunding bill introduced by Rep. Patrick McHenry (R-NC). The McHenry bill would establish an exemption under US securities laws to permit equity crowdfunding, subject to certain investment limits.
The thing that happened is this: Rep. McHenry introduced a separate module of legislation, in the form of an amendment to the Jumpstart Our Business Startups (JOBS) Act, that would immunize the nascent crowdfunding activities of angel investors, angel platforms and incubators that help startups raise money from accredited investors.
What's funny about it is this: the new module of McHenry legislation doesn't synch with his marquee crowdfunding exemption.
Here's a summary of the activities the new McHenry module - let's call it "the angel platform amendment" - would insulate from federal broker-dealer requirements:
Notice a common denominator is that all these activities are limited to Reg D Rule 506 deals. In practice, this means that the angel platform amendment is talking only about deals that are limited to accredited investors under Reg D, those who can invest in startups today without needing a crowdfunding exemption. (As a technical matter, Reg D Rule 506 does permit up to 35 non-accredited investors to participate in a deal exempted by the rule; but because other conditions apply when even a single non-accredited investor participates, this feature of the rule is hardly ever utilized.)
So what happens to a platform that accomodates both kinds of deals, those for accredited angels, under Reg D Rule 506, and those for everyone, under a crowdfunding exemption? What about a deal offered under both exemptions simultaneously?
I think it's arguable that the new McHenry module was drafted to accomodate a platform that hosts both kinds of offerings on separate tracks. But the concurrent offering scenario - the same deal being offered under both exemptions at the same time - that's a situation that neither the McHenry crowdfunding bill or the McHenry angel platform amendment address.
Two additional conditions for the protections of the angel platform amendment are that the given angel group, platform or angel-oriented incubator (1) receive "no compensation in connection with the purchase or sale" of the Reg D Rule 506 stock, and (2) "not have possession of customer funds or securities."
Condition (2) is similar to a condition in the crowdfunding exemptions proposed by McHenry, Brown and Merkley. But condition (1) would appear to distinguish populist crowdfunding platforms from "angel-only" crowdfunding platforms.
Kudos to Rep. McHenry for being so ambitious and for advancing the cause of crowdfunding on both fronts. In the Senate, or in reconciliation between House and Senate versions of legislation, it may yet be possible to join the 99% and the 1% in a better coordinated, universal crowdfunding exemption.
-- William Carleton is with the firm of McNaul, Ebel, Nawrot & Helgren. He also has experience as a startup lawyer and angel investor. Follow him on Twitter @wac6.