When Facebook purchased Oculus VR for $2 billion, much coverage was devoted to the significant returns the company’s venture capital backers realized. But some of Oculus’s earliest “investors”–their 9,522 Kickstarter backers–won’t see any upside at all, let alone a huge payout. Instead, these Kickstarter backers (who contributed over $2.4 million to help launch the virtual reality company) will walk away with only a t-shirt, poster, or other small tokens in recognition for their “donation” to Oculus. In fact, until now, US securities laws did not provide for the kind of crowdfunding regime that would have allowed Oculus to distribute equity in exchange for money raised through Kickstarter.
But crowdfunding rules are now on the horizon. Congress enacted the Jumpstart Our Business Startups (“JOBS”) Act in April 2012 to stimulate job creation by easing securities regulations that restricted small businesses’ ability to raise capital. The Securities Exchange Commission (“SEC”) then took more than a year and a half to promulgate the necessary regulations to implement the equity crowdfunding provisions in Section III of the JOBS Act.
Now, in the midst of the 90-day public comment period offered by the SEC, hundreds of commentators have voiced concerns about the new regulations. Experts, platform managers, investors and other professionals have submitted strong–yet contradictory–positions. The polarized calls for revision reveal the difficulty of easing the onerous restrictions on capital raising by enterpreneurs and small businesses while retaining the ability to adequately protect investors from fraud.
As the SEC continues to review these comments before issuing the final regulations, here is a list of the promises and pitfalls for both investors and entrepreneurs.