First, while the federal Jumpstart Our Business Startups Act of 2012 included provisions to enable more businesses to tap the power of social media and the Internet to raise money, the rules have not been written yet.
Second, a close look at the JOBS Act should make entrepreneurs think twice before raising equity by crowdfunding, Korn said.
Crowdfunding, in which individuals and organizations can raise money for projects - making movies and art installations - has exploded in popularity. The ability to raise small amounts of money from lots of people online in return for some reward is undeniably powerful. Businesses also turn to the Kickstarter or Indiegogo crowdfunding platforms to run campaigns to finance their own projects.
But when the reward is supposed to be equity, or an ownership stake in a company, regulators are going to err on the side of caution to protect investors, said Korn, who works in Pepper's corporate and securities practice group.
"There will be a train wreck at some point," he said. "That's what regulators are concerned with."
Right now, a small fraction of all crowdfunding activity involves equity investing. Just $116 million, or 4 percent, of the $2.7 billion of crowdfunding dollars worldwide involved equity investments in 2012, according to the research firm Massolution.
It may remain a small fraction because the JOBS Act limits the amount a U.S. company can raise to $1 million in a 12-month period. Any company that does successfully raise money through crowdfunding will have disclosure responsibilities, including filing annual reports with the Securities and Exchange Commission.
To Korn, there are enough legal gray areas that make crowdfunding far less attractive than traditional private placements that can raise far greater amounts of money from a smaller pool of investors - those with a net worth of more than $1 million or income of more than $200,000 in each of the two previous years.
That said, Korn believes crowdfunding has "tremendous potential." It's just that the JOBS Act's restrictions may dissuade entrepreneurs from trading equity for the wisdom of crowds.
Contact Mike Armstrong
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