Crowd Funding Legislation

Background

Crowdfunding or crowdsourcing is a cooperative approach to financing where many small investments from a large and diverse group of individuals (“the crowd”) collectively finance a singular initiative. Crowdfunding has recently garnered significant momentum. Businesses are now pushing to employ crowdfunding strategy to raise capital and offer, in exchange for investors’ incremental contributions, “profit participation” in the form of an “ownership interest” in their companies. Crowdfunding offers a valuable source of funding to many community renewable energy projects. Many groups looking for investors can now use the internet to pool funds used to get more projects off the ground.

Previously, there existed significant regulatory barriers that prevented the pervasive adaptation of this strategy. Specifically, the Securities and Exchange Commission (SEC) had in place:

  1. expensive registration laws that created financial barriers to crowdfunding,
  2. broad restrictions that prevented the public solicitation of investments and thereby impede companies’ ability to “use modern communications to inform and connect to investors” (Congressman McHenry), and
  3. pricey individualized state securities laws that acted as stiff financial obstacles and ultimately work to prevent crowdfunding.

Thus, the regulatory landscape has inadvertently prevented the adoption of crowdfunding, a process that could prove to be a catalytic force. Often times the most significant barrier to implementing a community power project is understanding and complying with the Securities and Exchange Commission’s (the SEC’s) regulations relating to the collaborative financing of these projects.

Passage

In April 2012 President Obama signed the JOBS Act, which included provisions to allow crowdfunding for certain renewable energy projects. Projects are allowed under the Act if:

  1. The project raises less than $1 million, and
  2. The project owner discloses certain financial information, such as income tax returns, financial statements reviewed by an accountant, or fully audited financial statements.

The $1 million funding cap correlates to a project size of about 200 kW of solar, which opens up the market significantly for community-based solar projects.

Moving Forward

As John Farrell outlines in his article, though, “it’s not all roses and unicorns.” There are still several potential hangups for the crowdfunding model, including:

  • The SEC still has to implement the new regulation (likely in early 2013)
  • Websites that host crowdfunding opportunities (e.g. Kickstarter) will have to comply with new regulations
  • The information disclosure requirements for potential project owners mentioned in the Act are not insignificant
  • Upfront costs such as legal fees, even for a modest crowdfunding venture, could still be $10,000 to $15,000
  • It’s not clear how crowdfunding solves the problem of capturing federal tax incentives

Check out additional information on crowdfunding here:

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