It Might Cost You $39K to Crowdfund $100K Under the SEC's New Rules

Here's a great example of how tiny entrepreneurial initiatives can be squeezed out of existence by regulations:

VentureBeat.com reports:

On October 23, 2013 the Securities and Exchange Commission (SEC) issued the proposed rules for Regulation Crowdfunding.  The 585-pages included an explanation of the rules, the feedback it received, and a cost/benefit analysis.

A cost/benefit analysis is common in many regulations to give the public an estimate of the costs associated with implementing the proposed regulation.  It answers the question, “Do the costs outweigh the benefits?”  For Regulation Crowdfunding it sheds light on the question, “How much will it cost to raise money via crowdfund investing, and how do I keep it to a minimum?” Here’s a closer look at what that analysis tells us.

The Background
The legislation requires that the selling of crowdfund securities take place on registered websites.  The websites hosting the transactions are known as funding portals or broker dealers.  These entities must register with the Securities and Exchange Commission (SEC) and the Financial Intermediary Regulatory Authority (FINRA).  The legislation mandates investors have access to a business plan, use of proceeds, a valuation of the company, and financials. Firm may need to retain a Certified Public Accounting firm to certify the company’s financials or audit the company’s books.  Every step costs money, from completing the required documents to retaining professional services to assist in compliance.

The SEC looked at 3 variables:

a) the success fee (in terms of a percent (%) of proceeds) paid to websites for facilitating the transaction,

b) the compliance cost related to the preparation and filing of individual forms both during and after a campaign, and

c) the costs for a Certified Public Accountant (CPA) review or audit (an expense that scales over $100,000).  Certain costs like the success fee as a percent of the raise are variable, others scale like the CPA/Audit costs for raises over $100,000 and others like the compliance costs are fixed.  The SEC provided both low and high estimates for these costs based on assumptions and surveys it took.

For raises under $100,000, the SEC estimates portal and compliance fees will eat up between 12.9% and 39% of the money raised. For raises over $100,000 but less than $500,000, that figure may drop down to 7.96%.  And for raises over $500,000 but under $1M, it may drop to 7.66%.

In other words, unless you have project that can justify a money raise of more than $100,000 and you are willing to dilute your raise by raising more than $100,000, the cost to meet regulations makes it pretty much impossible to crowdfund your project.