If the company wanted to limit this possibility, it might make the minimum investment, say $20,000. But then it still ends up with 100 investors, and important to this discussion, it has materially chipped away at the democratization of investing that this whole JOBs Act framework was supposed to enable.
A Common Workaround May Not Get the Work Done for the Little Guy
One way to side-step this problem, in part, is for the issuing company to work with a special purpose vehicle (SPV), which is formed to raise capital, for the purpose of investing into the company. Functionally, the SPV represents a single shareholder, where the general partner typically acts as the liaison between the company and the limited partners invested into the SPV.
But this doesn’t get us out of the woods. The SEC limits an LLC to having 99 investors. But, assuming 99 investors, each investing $2,000, the SPV is limited to a $198,000 investment into the company, falling far short of the target raise of $2 million.
The SPV can raise the minimum investment to $20,000 and just about make the entire investment, maxing out at 99 investors, which may solve the headache for the issuing company, but it doesn’t help Mr. Six- Pack. He is still on the outside looking in.
So it appears that democracy is still a work in progress. The point here is not to suggest that crowdfunding is a broken promise (at least for issuers) or that there isn’t tremendous potential for more investors to participate in ways that they had previously been unable.
Rather, the point for the small investor, limited in the amount of risk capital (and it is risk capital) they can invest, is that you still might find it challenging to participate in ways that you might have hoped. Your access to venture investing is likely to continue to be impeded by practical as well as regulatory constraints that issuing companies face. For these investors, Regulation A Crowdfunding is likely to be a more attractive option, but that is a topic for another discussion.
The point for issuing companies is that no two offerings are the same and that there is much to consider, strategically and architecturally, when determining whether and which crowdfunding framework is appropriate, if at all.
More ideas to come soon,