SEC Crowdfunding Exemption action: File No. 4-605


When I guestblogged here last year, I wrote about crowdfunded securities. The upshot was that crowdsourcing platforms like Kickstarter can't support investment, because that's illegal; they can only offer tiered "perks" for donations at various levels. But I (and others) believe that crowdfunded securities should be legal without expensive SEC registration under certain conditions, starting with if individual investment is capped at a relatively low figure, like $100.

In that post, I also floated the idea of crowdfunding a campaign to pursue such a "crowdfunding exemption." I invited people to contact me if they wanted to keep up with such efforts, and got nice feedback from a bunch of folks. Encouraged, I dug in some more and found out that getting something like this going would actually be easier than I thought. First of all, the SEC has the authority to rewrite its own regulations, without any congressional review (which sounds like a recipe for corruption, and indeed...). Second, the SEC, via its website, lets anyone submit Petitions for Rulemaking and solicits comments on these petitions. You send it, and they will post it-- and then also post all the comments they receive. This quiet backwater of the SEC's website struck me as good territory for some crowd action.

Now, a half year later, all the pieces are in place. A campaign on IndieGoGo quickly raised the money to fund the Sustainable Economies Law Center (SELC) to draft the petition, which was completed last week. I'm thrilled at how the petition came out-- it's very well researched and argued, and joy to read. The SELC sent the petition to the SEC last Thursday, and as of this morning, the SEC has posted it to their website, as File No. 4-605. You can see the list of funders in the first footnote, at the bottom of page 1. Huzzah!

In addition to the $100 cap on individual investment, the petition recommends: a $100,000 cap on the total offering; offerors can only be individuals; offerors can't have more than one offering open at a time; and disclaimers must be included stating the possibility of total loss of the investment, and that investors must carefully evaluate the offeror's trustworthiness.

This all sounds good to me, but maybe the cap should be $50, or $500, or $5000. The more thought that goes into this, the better, and now that the petition is on the SEC site, it's time for all of us involved to spread the word. For anyone who's interested, here's what you can do to help:

1. Email the SEC's Office of the Secretary at rule-comments at sec dot gov Include "File No. 4-605" in the Subject: header. If the document is an attachment, indicate the format or software used See the SEC's How to Submit Comments page for more procedural recommendations, but disregard the references to an online form or file numbers beginning with "S7-" or "SR-", which refer to other types of documents. You can also send your comments as hardcopy in triplicate via postal mail, for them to scan and post. (Either way, please keep it relevant and polite-- amusing though it may be to have your prank page appear on the website of the United States Securities Exchange Commission.)

2. CC the message to comments at crowdfundinglaw dot com -- this is just for me to archive what's been sent, to see if anything isn't making it onto the SEC site.

3. Explain in your own words what you think of the idea and what your personal interest in it is. Fine with me whether you're for it, against it, or somewhere in between-- the main thing is just to encourage the SEC to consider this issue and open a dialog. Note that if you cut and paste, they will designate your letter as an example of a "Type" rather than an original contribution, which presumably carries less weight. I don't think burdening the SEC with copy-pasted activist spam will make any friends there or help the cause.

4. Spread the word!

You can follow this effort at my freshly-minted Change Crowdfunding Law blog.

SEC File No. 4-604: Petition for Rulemaking: Exempt securities offerings up to $100,000 with $100 maximum per investor from registration. 


  1. The basic limit should be at least $250 per investor. The offeror limit should be at least $250,000, perhaps $500,000. Less than that makes even a small shop hard to fund with a responsible level of capitalization.

    A graduated investment limit might be a good idea – anyone can put in $250, no one can put in more than $5,000 (under this type of investment – other routes would still be open) but anyone investing between $250 and $5,000 must affirm that the amount that they are investing is less than say, 4% of their yearly income.

    Specific limits should be reviewed every 5 years or so and bumped up to the nearest round number every time the CPI has risen another 10% from its initial 2010 base.

    Offerors should not be limited to individuals – small partnerships, LLCs and corporations intending to file as S-corps should be fine. They should have a maximum pre-capitalization limit and a restriction on the number and type of owners – no parent companies or subsidiaries. Essentially sole proprietorships and regular partnerships should be fine, even if they are dressed up as corporations. This provides the possibility of limiting the liability of investors who could otherwise be liable for the actions of the businesses in which they invest, while preventing structuring games with shell corporations, limited partnerships and so forth.

  2. There’s a pretty substantial difference between someone with Catholic interests and someone with catholic interests. I believe, from what I’ve read of him so far, that Paul Spinrad’s interests are wide-ranging, rather than primarily focused on the well-known church.

  3. I truly wish you the best of luck. As a compliance employee of a dual registered Broker/Dealer & Investment Advisor, I’ve worked with the SEC on exemptive orders, Reg D, & securities registration.

    This will probably take a few years to ever be evaluated. The Commission is so far behind in enforcement, that rule making will take a back seat unless it’s tied to US financial reform being batted around congress right now.

    Could you elaborate what type of securities are being offered here? I don’t see how they could be equities, since per File No. 4-605 only individuals can make offerings, not entities. Bonds wouldn’t make sense, since they wouldn’t participate in the success of the venture, plus interest and principal repayment would only be back by the credit of the individual. It doesn’t seem possible for these to be derivatives or any form of collateralized security.

    If only natural persons are allowed to make offerings, wouldn’t that crowdfunded individual be opening themselves to possible litigation? If the project flops, they likely won’t be able to walk away and say “aw shucks, it didn’t work. Oh well.” Even extensive disclosure documents won’t alleviate the offering party from all obligations to share owners.

    We’ve only discussed registration and issuance. What happens in the secondary market & when these trade OTC? A few $100k is nothing to an institution or private firm that could sweep up the project and control a majority interest in the venture. Once the shares are issues, they’re out of the offering party’s control. Like an IPO there may be limits to the allocation of the initial offer, but once they hit the open market, trading is outside the scope of registration exemptions. Then is the small enterprise faced with the possibility of hostile takeover?

  4. This is odd, and glad I bookmarked this.

    This post seems to have disappeared off the main page. Any reason for that?

  5. It’s great to see crowdfunding getting coverage. If you’d like to know more, I’ve recently released the book “The Crowdfunding Revolution | Social Networking Meets Venture Financing”, which is available in paperback or ebook formats. It has a lot deeper thoughts about policy & regulation.

  6. Crowdfunding has the unique ability to reach like-minded people who all share a common interest. Trying to fund projects through the old traditional ways like investing, makes it extremely difficult for artist or activist who may only reach niche audience or the concerned few. Investors want to know bottom line and (ROI) return on investment. Which may not always be so predictable when dealing with arts or community driven causes. Crowdfunding provides an alternative way to fund these ideas. I don’t even see why the SEC should be involved in or even have some type of jurisdiction when it comes crowdfunding, after all it is not a security, it is not a stock and these people are not investing but donating. But since I am just a filmmaker and not some financial wizard I guess I will have to just play by the rules.
    However this is what I think.
    The maximum that an individual should be able to give should be $2,500. Which is the same amount individual can donate to a political candidate. I also think as a filmmaker, I would like the maximum to raised to $625,000. Which is also the maximum for a SAG Modified Low Budget Agreement, and at this amount it should cover all sorts of art related projects or community driven projects.

  7. Currently there are rules that allow for limited unregistered security offerings to unaccredited investors via Reg D 504 for up to $1MM. This was mentioned above in the comments. It should be noted the the biggest discrepancy between the popular “Crowdfunding” and Reg D 504 tends to be around general solicitation. The Kickstarter dream of marketing your idea publicly and getting gobs of money has inspired a lot of interest in doing something similar for businesses. Reg D 504 is currently the closest thing we have to this for the foreseeable future. I agree with one of the posters that it will be a long time before we see major changes to the laws and rules around this.

    There are a few tools out there working to make the use of 504 offerings simpler. One in particular, ProFounder, has even shown that these types of offerings can bee quite successful with the right support. For a short time ProFounder had a modified public offering (not strictly a security in their eyes) but the success rate was low enough that they discontinued that product to focus on friends and family style investments (reg d 504).

    I worry that people see crowdfunding as a way to get free money without having to work for it. I suspect even Kickstarter would agree that fundraising takes a lot of work and in the vast majority of cases involves people who you already know as the primary sources of money.

    This is great, i think the economy needs help, all you read is that small businesses provide 70% of jobs in the U.S. this is a great way to increase the number of small businesses = higher employment numbers!!!!

    Heck i would love to get 100K to hire new staff for my school catering business (in Florida that’s 2 full time and 2 part time staff members).

    Why would the SEC not approve this A.S.A.P, the whole reason the Reg504 rules exist is to protect investors from being swindled!!! Back in the 1930’s !!!!

    All this RegD 504 stuff was needed after the 1930’s crash, and scams, but that was them, today we have the world of information at our fingertips, and if the SEC limits these investments to $100 or $250 into companies offerings (max of $100K, or $250K), even if there is no immediate liquidity, what’s the risk exposure to each investor $250.00 ????? No one is losing their life savings on a $250 investment.

    Let’s not forget that at least this way the small investor might get a chance in hitting a homerun (even if it’s a small chance), if that investment never makes it to an IPO, but is still a successful business, there is a good chance that he/she will have options to cash out at par or at a profit of some sort.
    And who knows there could well be a trading market for these types of stocks, giving some sort of liquidity options for investors.

    This type of structure creates new businesses = new jobs!!!

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