Let the great experiment in financial democratization begin!
The SEC on Friday adopted final rules for Regulation Crowdfunding (aka Title III)—the last and most sweeping piece of the JOBS Act legislation, which was signed into law three-and-a-half years ago. With the move, the SEC opened up investment crowdfunding to the general public for the first time.
In crafting the final rules, the SEC weighed more than 400 publicly submitted comments and concerns voiced by the industry, which felt that a first draft version of the rules would prove too onerous. The final rules, as glimpsed by the SEC’s open meeting this morning, seem to strike a pragmatic balance between capital-raising flexibility and investor protection.
“The SEC’s decision to finalize the Title III crowdfunding rules will help more small businesses secure the capital they need to realize their full potential,” said John Arensmeyer, founder & CEO of Small Business Majority, a small business advocacy group “Moving forward with these rules is a step toward ensuring America’s small businesses have the resources they need to create jobs, drive innovation and strengthen local communities.”
The rules address some of the most problematic issues, especially for the crowdfunding intermediaries that, as the SEC stressed, will be the “gatekeepers” of the new market. Crowdfunding portals will have more flexibility in determining what companies they list on their sites, and may now take an equity stake in the companies, as long as they do so under the same terms offered to investors.
There was also good news for small businesses looking to raise capital: the rules waive the need for a financial audit for small, first time issuers. That requirement, as outlined in the first draft of the rules, would have imposed high costs on issuers.
Investor limits remain largely the same, with unaccredited investors capped at an aggregate investment based on their income or net worth—for example, individuals with incomes or net worth of $100,000 or less are capped at $2000 or 5% of their annual income or net worth over a 12-month period. The SEC clarified that the determination would be based upon the lower of those two measures.
Under new intratstate rules, companies may advertise publicly, as long as they only sell the securities to in-state residents.
At the same meeting, the Commission also voted to propose changes to two existing rules commonly used for community-scale offerings: Rule 147, aka the intrastate exemption, and Rule 504, a rule that falls under the Regulation D. The changes are intended to facilitate intrastate and regional offerings.
In particular, the Rule 147 modernization, as it was characterized, address what has been perhaps the biggest obstacle to intrastate crowdfunding: the ban on advertising an offering across state lines. That ban effectively killed communications on web sites and social media, not to mention old-school radio and newspapers. The proposed changes strike a common sense compromise geared toward modern day communications: companies may advertise publicly, as long as they only sell the securities to in-state residents.
The industry will be digesting the rules over the coming weeks. And challenges remain. The commissioners discussed the needs for secondary markets and improving the electronic clearing infrastructure to support small securities offerings. And Commissioner Michael Piwowar, the one dissenting vote of the day, expressed concern that the rules create “a complex web that may hold traps for the unwary and create potential nightmares for small business.”
Our takeaway: much education will be needed to make sure that investors, businesses and the network ecosystem of advisors and lawyers that support them go into this new world with their eyes wide open.
We’ll be analyzing what the new rules mean for investors, small businesses and the economy over the coming days and weeks. In the meantime, read the SEC press release here.