Private Placement Crowdfunding?
Private Placement Crowdfunding
Entrepreneurs seeking private placement services like a private placement memorandum (PPM) or help with an offering are often considering multiple avenues to raise investment capital funds. One opportunity that more and more entrepreneurs and growth companies are considering more and more is how to make use of crowdfunding. They as, “Is there private placement crowdfunding?” At PPM, we have been following trends in the crowdfunding world and advising our clients on when and how to make use of this powerful new tool.
Private Placement vs Crowdfunding
One thing that is important to understand is that crowdfunding does not replace private placement investment. Private placement services like the ones we provide at PPM involve raising capital from private, accredited investors (and/or a certain number of non-accredited investors) in a manner consistent with rules for safe harbor / safe harbour from certain SEC registration requirements. (See more about private placement services and what qualifies for exemption HERE). Sometimes private placement means selling equity securities (shares of stock), sometimes selling debt securities or debt instruments (such as bonds – many ask whether to use 144A vs Reg S, for instance).
Crowdfunding, on the other hand, involves raising money from accredited and non-accredited investors for various purposes, not necessarily through a securities offering. Crowdfunding often does not involve a private placement offering or anything like it – there may be no securities involved. The best known crowdfunding sites, like Kickstarter, operate in a category of crowdfunding that is essentially donation or gifting based. For almost any purpose—from funding an artistic project to funding a new venture to funding college tuition or medical treatment—people launch crowdfunding campaigns to help raise money. In exchange, donors are often promised rewards or “prizes,” but they don’t get equity in the resulting product / service / project, nor do they collect a principle plus interest, as they would through a bond or other debt financing.
There is a category of crowdfunding that brushes up against the private placement world, and that is equity crowdfunding. The rules are still being hashed out by the SEC and other regulatory bodies, but equity crowdfunding could be a path to raise money by selling equity securities (i.e., an ownership share or stock) to the “crowd.”
This Forbes piece makes clear how uncertain the world of equity crowdfunding currently is. For instance, the rules around non-accredited investors putting money into an entrepreneurial venture via a crowdfunding platform are still unclear. Of course, having access to a means of raising capital by selling equity to a large number of non-accredited investors is a major part of the appeal for equity crowdfunding. This would allow access to a wider pool of investors with fewer restrictions, opening the possibility of raising large sums of investment capital through a high volume of much smaller transactions.
The government is beginning to clarify rules, and those interested should get in touch with PPM for a free consultation to understand the full ins and outs of the JOBS Act, the upcoming Main Street Growth Act, and other relevant legislation and regulation. The piece mentions the intriguing possibility that could result from the Main Street Growth Act:
The proposed bill calls for the creation of what is being called “venture exchanges” – secondary markets where early investors in startups and small businesses could sell their shares, and new investors could buy in and trade these private stocks.
Stay posted for more info.