So are we gonna call it “crowdfunding” or what?

Last week I had the opportunity to attend the CrowdFundUSA conference in Atlanta, GA. Although there were the usual outstanding panels about everything related to crowdfunding, one panel stuck out in my mind.

The participants on the panel included CEOs Brian Dally from, Megan Johnson from and David Lillenfeld from In addition, Rodney Sampson, the well-known author of Kingonomics and founder of the Opportunity Hub in Atlanta was on the panel.

The presumptive topic of the panel had to do with intrastate crowdfunding, an area that has created a lot of discussion, but little action, over the past year. But Brian Dally (a notably outstanding speaker) brought up the problem with the overuse of the term “crowdfunding”.

As Brian correctly noted, the word encompasses so much territory. From a simple bake sale to a rewards campaign on Kickstarter to lending for a real estate project, “crowdfunding” really ends up being completely meaningless. Brian passionately (and correctly) argued that the use of the word “crowdfunding” was actually offensive as it related to companies that only raised money from accredited investors. Only 7% of Americans have enough income or net worth to be considered “accredited”. Brian rightfully believes that only opportunities that are supported by a broad “crowd”, which by definition includes more than a small sliver of Americans, should be allowed to be called crowdfunding.

This discussion engaged the audience and the other panel members. David Lillenfeld stressed that one of the issues that faced Sterlingfunder was the confusion and comparison with Kickstarter, where instead of shares of stock people receive token rewards. Brian noted that the term “microlending” actually tested better against other terms when marketing Groundfloor offerings. Megan formulated the term “micro angels”, which seemed to generate enthusiasm with the group.

I personally think the term “micro angels” is extremely problematic. After all, micro = small. And angels suggests someone who is about to lose their money in a new startup. The resulting pitch doesn’t strike me as persuasive. “If you invest in equity crowdfunding, you will be a SMALL LOSER.”

But everyone on this panel was exactly right: the use of the word “crowdfunding” is too broad to accurately communicate the public’s investing opportunity and the incredible funding and marketing power to the companies that effectively utilize it.

So what do you think?


Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Reg A+, The “Real” Crowdfunding?

Raising money is awfully confusing. It seems like there are a never-ending number of legal restrictions from federal and state regulators. The fact is that most companies that raise small amounts of money ignore the law entirely. The remaining private companies that raise money almost always use “Rule 506” – part of Regulation D. That federal exemption permits companies to raise money from individual investors (provided most are wealthy – also known as “accredited) and there is limited interaction with state regulators. All the rest of the rules are basically unused.

One “unused” rule is called Regulation A. As it stands now, there are really very few Reg A offerings. The reason is that each individual state where a Reg A offering is made needs to approve it. You can imagine that is a big ol’ pain in the rear end! However, as part of the JOBS Act, there is something new. It is commonly called “Regulation A+”.

The rules have been proposed by the SEC. And unlike the proposed crowdfunding rules, there has been near unanimous support for those rules.

In short, in a Reg A+ offering, a company can:

1. Advertise that they are raising money.
2. Raise money from anyone (not just accredited investors).
3. Raise up to $50 million.

Attached is a copy of the comment letter that I submitted to the SEC. Of course, the proof will be in the pudding. But there is real reason to be optimistic. Although the letter is in legalese, hopefully the message will get through to the SEC. We want companies to be able to raise money – and we want every investor to have a chance to become involved with their favorite local companies.

sec comments reg a+


Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Comments to the SEC about Crowdfunding

A few months ago, the Securities and Exchange Commission published proposed rules which govern how equity crowdfunding is going to work in the US. The proposed rules are extensive – covering nearly 600 pages. I am not alone in spending a sec seallot of time reading the rules and making comments. There have been a great number of other people who have participated in the process. You can read all the comments here:

So now the ball is back in the SEC’s court. Hopefully we will have some final rules soon. Although it won’t be everything we want it to be, a new industry will finally come to life. And we are all lucky to be part of it.

SEC Comment Letter from Jon Frutkin (pdf)


January 30, 2014

Elizabeth Murphy, Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Re:          File No. S7-09-13, Release Nos. 33-9470; 34-70741, Comments regarding Proposed Rules on Crowdfunding, Title III, The JOBS ACT

Dear Ms. Murphy:

First: a compliment. Although there has been a great deal of criticism relating to the specifics of the proposed rules and their extensive breadth, the Commission has done an admirable job of developing a framework for Title III of the JOBS Act which is true to the law itself. Of course this has been an enormously complicated undertaking. It is an ongoing challenge resolving the tension between unlocking capital while ensuring transparency.

However, we must remember that less than 20 years ago, a small Internet start-up named eBay successfully convinced us that people could trust each other when paying for auction items – payments made for a product sight unseen and to a stranger somewhere around the world. A person’s character is now judged by each and every transaction, and eBay proved that while fraud could never be eliminated. But fraud is disappearing in a world where trust is earned one online transaction at a time.

A great number of comment letters have already been submitted, focusing on various parts of the hundreds of pages of proposed rules. But there is one area of particular concern: what happens the “day after”?

Last year, I wrote the book Equity Crowdfunding: Transforming Customers into Loyal Owners. There is widespread opinion that equity crowdfunding will be a powerful tool to raise funding for start-up businesses. However, my belief is that crowdfunding is a great opportunity for profitable local businesses. Equity crowdfunding turns customers into super-customers, becoming marketing evangelicals that help drive revenue. In exchange, investors will receive dividends, their share of the profits which hopefully increase over time due to the new enthusiasm for their company. With that backdrop, I have thoroughly reviewed the Commission’s proposed rules.[1] And while I obviously have opinions about many aspects of the proposed rules, I focus my comments on this one relatively narrow area.

Of significant concern is the proposed requirement, found nowhere in the JOBS Act itself, that issuers raising more than $500,000 must have an audit performed each and every year moving forward.[2] Because of the transaction costs associated with raising equity crowdfunding, I posit that nearly all of the successful rounds of funding will be in this $500,000+ category. However, the ongoing cost of annual audits is such a significant deterrent that it needs to be reconsidered prior to the finalization of the rules.

So consider a successful company; one generating a return of 12% on capital. Most investors would be satisfied with a return that is considerably greater than the average return provide by public companies. Using the mid-point of $750,000 total investment, a 12% return on capital would mean $90,000 annually to those investors. But using the rough estimate of $30,000 per audit[3], this means that fully 1/3rd of the investors return would be eaten up by an audit – every single year. This audit is in addition to whatever other compliance costs come along with the annual reporting requirements.

In short, requiring an officer’s signature under the penalty of perjury, indicating that the financial statements provided to the Commission and the investors are true and correct, is sufficient to promise punishment where fraud exists. And it prevents a solid return from being greatly depleted because of the existence of a rule that is nowhere to be found in the law.[4]

Next, I have great concern about requiring publication of an issuer’s financial reports on the company’s website[5]. Certainly there is no disagreement that this information should be public. The proposed rules contain the commonsense requirement that a Form C-AR be filed and accessible online through EDGAR. It is unquestionably reasonable for the public to be able to easily access these reports, and it is paramount that prospective investors in the secondary market can receive this information.

To comply with the law’s mandate that the investors receive these reports, an issuer can be required to provide that information directly. A company could utilize one of many alternative methods. For example, the rules could require that the issuer provide the report via email, on a website that is password protected with the login information distributed to investors, or simply by mailing using first-class mail to the investor’s preferred mailing address.

The idea that financial information is going to be prominently displayed on a company website is distasteful. Whether the company is having an up or down year, this information is irrelevant to the 99% of the visitors to their website. While looking for hours of operation, key employee bios and contact information, web visitors should not be instantly privy to financial information simply because the company at some distant point in the past utilized Title III.

And the resulting impact would be unfortunate. Companies that are extremely successful may be tempted to redeem their crowdfunders ownership interest just to avoid publishing information right on their website. Or worse, companies that may be suffering from short term issues may have less customers because of the publication of the information – resulting in a deadly sales tailspin.

The Commission would be correct to require that financial reports be distributed to crowdfunders (at least to those that the issuer has current contact information).

Publication on the web through EDGAR is a must. But it is counter-productive for those financial statements to be on the issuer’s website. Just like publicly traded companies now, information should be obtainable. However, forcing financial reporting on an issuer’s main website is a mistake.

Although not required by the proposed rules, the Commission should carefully monitor the necessity of requiring crowdfunded companies to engage the services of a registered transfer agent.[6] Although for some companies it may not be problematic, one can imagine the mayhem that could be created once hundreds (and sometimes thousands) of new investors are trading stock on some secondary markets. The mechanisms for tracking capitalization tables (and investor contact information) are available for more sophisticated and organized business managers. But it is potentially a disaster where the company would be unable to pay dividends or make distribution of assets after selling or dissolving the company.[7]

I join with the incredibly energetic people who are actively involved in the equity crowdfunding community in offering our help. We all recognize that rule-making and enforcement cannot happen in a vacuum. And I remain available to provide further information and opinion to the Commission as crowdfunding becomes a commonly used tool to help grow and promote American business.


Jonathan Frutkin

[1] I am also the CEO of Cricca Funding, LLC. More information about our crowdfunding advisory services and commentary are available at
[2] See Crowdfunding; Proposed Rules, Release Nos. 33-9470; 34-70741 (“Proposed Rules”) at p. 92-3; §227.202 (referencing §227.201(t)).
[3] The proposed rules estimates the amount to be $28,700 which may be on the conservative side for a restaurant, car wash, landscaping company or other local business which has extensive operations and cash flows. See generally Proposed Rules at p. 368.
[4] Section 4A(b)(4) requires financial statements to be filed at least annually pursuant to rule of the Commission. It does not intimate that these financial statements should be audited or reviewed. To the contrary Section 4A(b)(1)(D), explicitly references audited and reviewed financial statements depending on the size of the offering.
[5] Proposed Rules at p. 94.
[6] Proposed Rules at p. 145.
[7] The Commission has expressed concern that because of the secondary market, the company may not know the identity or email address of the investors. Proposed Rules at p. 94-5. Ultimately, the issuer needs to know who owns the shares. The portal or broker could give this information to the issuer and/or its transfer agent upon closing. Any transferring shareholder could certainly be required to communicate the new contact information to the issuer.
Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

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