This past Friday, the long-awaited Veronica Mars movie was released in theaters. With it came renewed attention to the concept of “crowdfunding,” which is raising money through a large number of small investors. Through the crowdfunding website Kickstarter, more than 90,000 individual backers gave $5.7 million towards the film in exchange for incentive rewards like autographed posters and cameo roles in the movie.
Most start-ups do not already have a dedicated fan base willing to invest millions in exchange for bumper stickers. However, thanks to changes in the Securities Act of 1933 implemented in Title III of the Jumpstart Our Business Startups Act (the JOBS Act), small businesses will be able to use crowdfunding to offer equity stakes. By providing an exemption from some of the more onerous securities registration requirements, Section 4(a)(6) crowdfunding allows certain issuers to sell to non-accredited investors for a short period of time.
For one, the amount of capital that the movie could have raised through crowdfunding would have been much lower. The Section (4)(6) exemption limits the total capital that can be raised to no more than $1,000,000 in a twelve month period. It also limits follow-up fundraising.
Another difference would have been disclosure requirements. While the new JOBS Act requirements will be less stringent than those for other regulated securities, the exemption still requires that certain financial statements be provided for investors. As an issuer offering more than $500,000, the Veronica Mars production team would have had to file, provide and make available to investors and intermediaries its audited financial statements.
Lastly, audiences would have had to wait even longer for the popular mid-2000s television show to appear on the big screen—the comment period for the proposed rules for the crowdfunding exemption just ended. Until the final rules are adopted, no issuer can rely on the Section 4(a)(6) exemption.
While a well-publicized, high affinity projects like Veronica Mars do not need to rely on the new JOBS Act rules to raise capital, the crowdfunding exemption will soon open up doors for small businesses to raise equity and debt capital.