Attorney Cautious About Benefits of ‘Crowdfunding’May 27, 2012 – In The News
Michael S. Harrington, chair of the Corporate Department at Fox Rothschild LLP, recently spoke about crowdfunding to a group of attendees at the event “Power to the Crowd!: The Promise (and Pitfalls) of Crowdfunding.”
According to Harrington, “crowdfunding” – using the internet to collectively pool and raise capital for another person or organization - represents “an amazing new landscape for raising capital for young companies.” However, as Harrington believes, crowdfunding has significant drawbacks and may never transform the investing world.
First, Harrington spoke about crowdfunding following the JOBS Act. The JOBS Act includes provisions that make crowdfunding a legal option for capital seekers. Yet, as Harrington noted, the Securities and Exchanges Commission (SEC) has 270 days to decide on what sort of rules should govern crowdfunding in actual practice. Because the SEC has ignored deadlines like this before, Harrington believes that crowdfunding may not be a practical option for capital seekers until the end of the year.
Also under the law is a provision that limits crowdfunding transactions to be conducted through a broker or a registered “funding portal” that would act as a intermediary between the two sides. Harrington foresees that the funding portals will become subject to disclosure and reporting requirements similar to other organizations that offer investments. Because of this, Harrington believes that the cost of capital will rise making crowdfunding “an expensive and time-consuming process.”
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