Crowdfunding and 506 Private Placements

31 Dec


I read an exceptional article back in November written by Daniel Gorfine and Ben Miller.  Daniel is Director of Special Projects & Legal Counsel for the esteemed Milken Institute and Ben is Co-Founder of Fundrise – a direct investment platform for local real estate and businesses.  Their article was pertaining to the possibility of the Jobs Act creating a Two Tiered System within the crowdfunding industry.

In brief, once the rules regarding the private placement portion of the  JOBS Act are finalized, those offerings will be allowed to advertise alongside their Crowdfunded brethren.  Private placements issued under Rule 506 are targeted towards Accredited Investors.  These are the sorts of individuals that are of high net worth and considered “sophisticated” by the SEC.   This follows along the same lines as individuals who invest in hedge funds.

This is a large pool of funds, to quote the aforementioned article;

”…even without the ability to solicit investments generally, approximately $895 Billion was raised in 2011 under Rule 506, more than five times the $169.9 Billion raised in global IPOs in the same year.  And the estimated $2.8 Billion that will be raised worldwide via crowdfunding this year is a comparative trickle.”

Until crowdfunding is actually legal, the $2.8 Billion is a guess at best but the numbers are expected to be significant.  Without any statutory limit on the amount a private placement may raise, the picture has the potential to change dramatically.

Read more…

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