US$500 and a click: investing the “crowdfunding” way

Purpose – The purpose of this paper is to provide a preliminary explanation of “crowdfunding,” as defined in the Jumpstart Our Business Startups (JOBS) Act, subject to more specific rules that will be issued by the SEC later in 2012. Design/methodology/approach – The paper provides an introduction to crowdfunding followed by preliminary explanations of the criteria for securities offerings that are exempted from traditional registration, requirements for brokers or funding portals that serve as crowdfunding intermediaries, disclosure and other requirements for the issuing company, the types of companies that would be likely crowdfunding issuers, significant risks and pitfalls potential crowdfunding issuers need to consider, and the potential effects of crowdfunding on a company's prospects for later‐stage funding such as venture capital. Findings – The success of crowdfunding will likely depend on whether the rules to be defined by the SEC allow for a lean, efficient process for early stage capital raising or a complicated set of rules that makes crowdfunding unappealing or costly to startups and small issuers. Originality/value – The paper provides practical guidance from experienced financial services lawyers.