Larry Ribstein —  17 November 2011

Should you have to do a costly SEC registration and work through a registered broker-dealer just to raise a little money for your start-up? 

Today’s WSJ covers so-called “crowd-funding.” It tells of a guy who raised $41,000 from 17 investors.  The business has done well, but the website it used was ordered to stop doing this because it wasn’t a licensed broker-dealer.  

Supporters of a crowd-funding exemption are rallying near the SEC in Washington today (Occupy the SEC!).

The House has voted an exemption that would allow sales of up to $2 million in equity online to investors whose crowdfunding investments are up to $10,000 year or 10% of their annual income.  A Senate bill would limit these amounts to $1 million and $1,000.

Opponents of crowdfunding exemptions cite the potential for fraud.  But surely there’s a balance between fear of fraud and permitting what could be a significant jobs-generator.

For some academic coverage of crowd-funding see Heminway and Hoffman (arguing that “the offer and sale of crowdfunding interests under certain conditions should not require registration” and suggesting “principles, process, and substantive parameters of a possible solution in the form of a new registration exemption adopted by the SEC under Section 3(b) of the Securities Act”); Steve Bradford (proposing to exempt certain crowdfunding sites from federal regulatory requirements but not antifraud rules); and Hazen (reviewing proposed crowdfunding exemptions and arguing that “the proposals to date do not adequately justify an exemption”).

Larry Ribstein


Professor of Law, University of Illinois College of Law