Saturday, January 4, 2014

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: 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.


  1. Establishment doesn't want people to realize if they work together they can be powerful!

  2. And so a result is achieved by regulation that would probably not be attempted by legislation. As always, the crony connected prevail. . .thanks to government.

  3. Jerry Wolfgang is thankful for this "protection". Nothing to see here just a mere 39k. Doesn't affect markets at all. What are you libertarians complaining about?

    1. Right, I'm curious how this can be spun from the other side. Would they say that they're:

      1) stopping terrorists from crowdfunding a suicide bombing?
      2) preventing fraudsters from setting up another ponzi scheme (because if you can't catch Bernie Madoff through a regular audit, you might as well stop everyone ever from being able to start a project that could possibly be fraudulent)
      3) Stopping druggies from crowdfunding a Breaking Bad-inspired meth lab, complete with all of the latest technology as employed by the major pharmaceutical companies?