Tuesday, November 26, 2013

SEC Releases Proposed Rules on Crowdfunding for Security Offerings

The Jumpstart Our Business Startups Act (the JOBS Act) was signed into law in April 2012, and it created a new Section 4(6) of the Securities Act of 1933. This new section exempts crowdfunding security offerings from Securities Exchange Act of 1934 (the Exchange Act) registration and its periodic reporting requirements. The JOBS Act directed the SEC to adopt rules to implement various provisions of the crowdfunding security exemption.

On October 23, 2013, the SEC voted unanimously to release its proposed rules for the crowdfunding security exemption of the JOBS Act (Proposed Rulemaking Release No. 33-9470). The proposed rules appeared in the Federal Register on November 5, 2013, and the comment period runs through February 3, 2014.

Certified public accountants may be interested in these proposed rules if they have clients who desire to sell securities to investors through crowdfunding. In addition, some clients may be interested in purchasing securities that are offered by companies via crowdfunding.

Since the proposed rules are over 500 pages long, today I will only provide background information regarding the crowdfunding securities exemption and mention what entities do not qualify for the exemption and what limitations are placed on investors under the JOBS Act and the proposed rules.


Crowdfunding is a method to raise money using the Internet and serves as an alternative source of capital to support a wide range of ideas and ventures, including charities, civic projects, creative projects, disaster relief, inventions development, and scientific research. When individuals or entities raise funds through crowdfunding, they typically seek small individual contributions from a large number of people. The crowdfunding campaign generally has a targeted amount to be raised and an identified use for those funds. Individuals interested in the campaign may share information about the endeavor with each other and use the information to decide whether or not to fund the campaign.

Crowdfunding has been used to fund, for example, artistic endeavors, such as films and music recordings, where contributions or donations are rewarded with a token of value related to the project. For example, a person contributing to a film's production budget is rewarded with tickets to view the film and is identified in the film's credits. A number of entities operate websites that facilitate crowdfunding, with some websites specializing in certain industries, such as music and the arts. Some of the more popular crowdfunding sites include Kickstarter, Indiegogo, Crowdfunder, RocketHub, Crowdrise, and appbackr.

The idea behind the crowdfunding security exemption in the JOBS Act is to allow private companies to raise relatively small amounts of capital from a large number of investors without having to register the securities issued with the SEC or under state blue sky laws. The proposal would let businesses use the Internet, mobile technology, and social media to raise up to $1 million a year from investors via crowdfunding. Under the JOBS Act, the SEC is required to adjust the $1 million dollar amount every five years to reflect changes in the Consumer Price Index.

Under the proposed rules, the crowdfunding security exemption would not be available to any of the following:
  • Foreign issuers
  • Issuers already subject to the periodic reporting requirements of the Exchange Act
  • Investment companies
  • Issuers not having a specific business plan or having indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies
  • Issuers that have sold securities in reliance of the crowdfunding exemption during the previous two years but have not filed with the SEC and have not provided to investors the annual reports required by the crowdfunding regulation
  • Issuers that are otherwise disqualified because they are associated with felons or other “bad actors”
Limitations for Investors

The original petition to create a crowdfunding securities exemption was submitted to the SEC in 2010 prior to the JOBS Act. Under the terms outlined in the petition, investors would have been allowed the opportunity to help entrepreneurs raise capital by creating an exemption from the federal filing requirements as long as the investors did not invest more than $100 per security offering. Although this petition did not succeed, it did spark an interest in the subject that was realized in the JOBS Act.

Under the JOBS Act and the proposed rules, individual investors who wish to invest in crowdfunded investments would be permitted to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.

Investors with annual income or net worth that is more than $100,000 would be allowed to invest up to 10% of their annual income or net worth, whichever is greater but with an annual cap of $100,000.

Investors would not be able to resell the securities for one year.

Investors have an unconditional right to cancel an investment commitment within 48 hours after making it. However, a cancellation during the final 48 hours of the crowdfunded offering is only permitted if there is a material change to the offering terms or to other information provided by the issuer with respect to the offering.

The annual income and net worth limitations have made the maximum allowable investments under the JOBS Act much higher than the cap of $100 per offering that was in the original petition. Perhaps Congress equates success with converting a simple idea to something much more complex? The increase in the investment amount has substantially increased the possible risk to investors. Given that the mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation, this might explain the length of the proposed rules.

In my next blog, we will look at the use of intermediaries and the reporting and disclosure requirements associated with securities offered through crowdfunding.

Monday, November 11, 2013

Valuing and Accounting for In-kind Gifts

With the end of the year rapidly approaching and the holiday season close at hand, you may be thinking about how to get rid of clothes you haven’t worn in several years or that extra piece of furniture you no longer need. Your first thought is probably to give it to a charitable organization.

Have you ever wondered how a nonprofit organization accounts for noncash assets or in-kind gifts? Or maybe you are the accountant for a charity; trying to be sure you have properly accounted for and reported the in-kind gifts your organization received.

Nonprofit organizations receive varied donations from the public, including donations of cash and noncash assets. The accounting recognition and measurement requirements related to noncash contributions are generally the same as those for cash contributions. That is, they are measured at fair value and recognized as contributions when received by the nonprofit organization. There are however, accounting issues specific to certain types of noncash contributions including in-kind gifts. I will try to answer some questions about defining, recognizing, tracking, and finding help for valuing in-kind gifts.

What are in-kind gifts?
Donations such as thrift-store inventory, contributed advertising; and marketing media; donated items sold for fund-raising purposes; gifts of long-lived assets; and vehicles received in connection with vehicle donation programs are examples of in-kind gifts. In-kind gifts include contributions of tangible and intangible personal property. Tangible in-kind gifts include contributions of items such as clothing, furniture, equipment, inventory, pharmaceuticals, and supplies. Intangible in-kind gifts include contributions of items such as advertising, other services that aren’t considered personal services, patents, royalties, and copyrights.

When is an in-kind gift NOT an in-kind gift?
Even if the organization has decided to accept gifts-in kind, it may not be the recipient of a contribution. Sometimes, donated materials or supplies are passed from one organization to another at the request of the donor. If a donor doesn’t give the nonprofit organization the discretion to choose who will get the donated items, the nonprofit organization serves only as an agent, and the donated materials aren’t reported as contributions revenue when received. Likewise, when the nonprofit organization distributes the donated materials or supplies to the ultimate beneficiary, the transfer isn’t reported as a contribution made.

Do in-kind gifts have to be tracked?
Although it can be challenging to track and value in-kind gifts, the difficulty in doing so isn’t an acceptable reason for not recognizing them. FASB ASC 958-605-30-11 states that in-kind gifts that can be used or sold should be measured at fair value. Thus, it isn’t appropriate to state in the notes to the financial statements that the value of noncash contributions isn’t reflected in the financial statements because it is impracticable (or difficult) to estimate the value. It also isn’t appropriate to state that in-kind gifts aren’t recognized because there is no objective means of valuing them. A good faith attempt to determine value results in better information in financial statements about an organization’s level of contributions and programs than no value at all.

Where can I find help valuing in-kind gifts?
Locating resources to assist organizations in valuing in-kind gifts, other than property, isn’t always easy. Authoritative literature provides only broad, general guidance, and many organizations struggle to find useful guidelines to help value donated assets. Four resources providing guidance on valuing various types of in-kind-gifts are as follows:

·       Online prices.
·       Salvation Army’s Donation Valuation Guide.
·       TurboTax® Its Deductible® Software or Book Edition

·       IRS Publication 561, Determining the Value of Donated Property.

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