Since the proposed crowdfunding rules were released on October 23, 2013, the top concern for many in the industry has been that the costs of compliance would make crowdfunding too expensive to be useful. Our Crowdfunding Cost Model further backed up this concern, indicating that offerings under approximately $115,000 would actually result in negative cash flow over a 5 year horizon and larger offerings would result in an exorbitant cost of capital:
According to our analysis, the biggest cost driver is the requirement that companies file ongoing annual reports, including both narrative disclosure and financial statements every year after the offering.
To address these concerns, we’ve submitted this Comment Letter to the SEC to ask that these annual reporting requirements should be limited to only to the materials required by the JOBS Act and that exceptions to these requirements should be implemented for:
- small offerings below $350,000,
- where there can be no investment decision,
- for Institutional, VC or Angel led deals and
- where all of the investors have contractually waived the right to receive ongoing reporting.
If you agree with our Comment Letter and that the costs for crowdfunding should be kept under control, click the link below to let the SEC know.
January 21, 2014
Ms. Elizabeth M. Murphy
U.S Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Proposed Regulation Crowdfunding (Release Nos. 33-9470; 34-70741; File No. S7-09-13): Ongoing Reporting, Costs and Practical Implications
Dear SEC Commissioners and Staff:
We would like to thank you for all the thought and hard work in drafting and releasing Proposed Regulation Crowdfunding. We believe that this is a great framework for a new industry and hope that it, with some modifications based on industry feedback, can give true meaning to the legislative intent of the JOBS Act (namely, to create jobs).
Based on our research, we believe the largest obstacle to making crowdfunding a viable option for startups and small businesses is the post-offering ongoing annual reporting obligations, including the annual disclosure and financial statement requirements. Issuers would be required to effectively become mini-public companies with reporting obligations potentially extending indefinitely. These items create a cost structure that is out of proportion with the amounts proposed to be raised, particularly for smaller offerings under $350,000.
Specifically, in this letter, we request both (i) a reduction in the scope of the required ongoing reporting obligations and (ii) implementation of several exemptions from ongoing reporting obligations (both disclosure and financial statements). These changes are required to make use of Regulation Crowdfunding a viable option for young startups and small businesses from a cost and time burden perspective.
This post was written by James Han on January 22, 2014
SEC Comment Letter: Crowdfunding Costs Are Too High – Tell the SEC Today