January 21, 2014
As a company (www.directcabcall.com) who has spent the past year raising funds (about $100,000.00)and are still raising funds for our start-up. We have primrily has developed an Android iPhone app for nationwide internet taxicab service, and we certainly believe the overall crowdfunding proposed rules are excellent and obviously very well considered.
However, we find the requirement for "audited by an independent public accountant or auditor" to be the single item that would severely handicap the process and essentially nullify the intent of the Jobs Act. A required audit is the primary reason we were not able to offer shares in the first place under the current SEC regime. Instead of issuing shares under SEC current rules, we have had to resort to loans because an audit is literally "the straw that broke the camel's back" in an haystack of costs, fees, taxes, etc. in beginning our start up. (In fact, loans and convertible notes have become the method of choice for start-ups and even Venture Capitalists who don't require an audit.
If you really want the Jobs Act provision for crowd source funding to work, you can't have an excellent overall structure, yet an entrance fee that keeps entrepreneurs from using it.
Requiring an audit might be good for accounting firms, but it serves very little purpose for the start-up or the investors under crowdfunding. It is a carry-over from SEC rules to protect much larger investors. The small investors in crowdfunding not only do not require this level of scrutiny and protection, but they would most likely not even give it any great consideration or weight in determining whether to invest.
The most generous auditing firm will start at about $10K, with fees escalating quickly thereafter - this "straw" on the camel's back can become very large indeed. Very few start-ups could afford auditing fees for the purpose of auditing a new business that doesn't have a whole lot to audit.
The requirement of an audit is thus a death nil to the crowdsource funding start-up. If one is still enamoured of the start-up audit, then perhaps it would be better to have this requirement triggered only when a company reaches a certain size in investments or investors, or when X amount is taken in from investors investing X amount or more.
Requiring an audit under crowdsource funding will generally have the same effect it has under current SEC rules - it will force the entrepreneur to avoid such funding as we have had to do with our start-up company.
If you really want the Jobs Act crowdsource provision to work you can't have and excellent set of rules and procedures, yet an entrance fee that essentially runs off your potential entrepreneur.