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Exciting Capital Raising Option For Small Rhode Island Startups: SEC Approves Federal Crowdfunding Rules

On October 30, 2015, the Securities and Exchange Commission (“SEC”) approved the long awaited and much anticipated final rules permitting federal crowdfunding pursuant to Title III of the Jumpstart Our Businesses Startups Act of 2012 (“JOBS Act”). See Press Release, Securities and Exchange Commission, SEC Adopts Rules to Permit Crowdfunding, 2015-249 (Oct. 30, 2015). Although the rules will not become law until sometime next year, and related protocols need to be approved, Title III crowdfunding offers domestic startup companies the ability to raise up to $1 million in any 12 month period through the issuance of common equity securities (stock) to accredited and non-accredited investors.

Crowdfunding has a distinct advantage over other capital raising vehicles for young companies because issuers can advertise their companies and offerings over the Internet, albeit through SEC approved “Portals,” which allow them to access a larger audience than most other capital-raising vehicles.

Proponents of crowdfunding conclude that there is a pent up demand in the investor community, especially from small, non-accredited retail investors, to get involved on the ground floor of young companies with new ideas and enthusiastic employees that have the potential to grow. Think Oculus VR, for example.

While crowdfunding will require certain costs and expenses to ensure compliance with the rules and to keep companies free of legal trouble after the offerings, the filing and related requirements are manageable and not nearly as cumbersome and costly as other capital raising options under the federal and state securities regimes. This is precisely what Congress had in mind when it enacted the JOBS Act: facilitate capital formation, which in turn leads to jobs growth.

Because Rhode Island does not have its own crowdfunding regulations, which many states including Massachusetts do, Title III crowdfunding offers Rhode Island startups a potentially attractive source of funds, especially given the unavailability of bank lending and the disadvantages and limitations of other capital raising ventures.

Importantly, the rules surrounding crowdfunding and related state corporate and securities law legal requirements present certain hurdles for companies seeking to pursue Title III crowdfunding. As such, companies seeking to avail themselves of this vehicle would be well-advised to seek the assistance of qualified legal counsel. For a more detailed discussion of the rules and potential pitfalls for the unwary, see SEC Finally Adopts Federal Crowdfunding Rules: All That Glitters May Not Be Gold.

In sum, despite some of the drawbacks of Title III crowdfunding, this capital raising vehicle can be extremely helpful to young startup companies in need of initial funding and beyond. As discussed, while the rules will not become law until sometime next year, companies interested in pursuing Title III crowdfunding would do well to start their planning now.

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Adler Pollock & Sheehan P.C.

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