Last week, the Securities and Exchange Commission (SEC) moved one step further in enlarging the pool of capital available to entrepreneurs when it unanimously voted to propose regulations to allow unaccredited U.S. investors to invest in startups and small businesses for equity, as set out in Title III of the JOBS Act. I took a look at reactions to this latest step and how it compares to a couple of other nations on a similar mission.
As we reported last month, the SEC announced it would allow startups to ask accredited investors for up to $1 million in collective equity investments publicly without having to register the shares for public trading. This marked a major change in U.S. financial regulations by lifting an 80-year ban on general solicitation by early stage entrepreneurs—joining the United Kingdom and Australia in legalizing equity “crowdfunding.”
Exactly a month later on Wednesday October 23, 2013, the SEC proposed rules around how unaccredited U.S. investors can invest for equity as set out in Title III of the JOBS Act. The SEC also took time to respond to critics of the JOBS Act by issuing regulations preventing fraud, such as a $5,000 annual cap on the investment of new, inexperienced investors.
This and other regulations are long overdue. The 2012 JOBS Act called for the SEC to issue the rules for crowdfunding by no later than January of 2013. Now the SEC is trying to catch up, and has made the full set of proposed rules (585 pages) available on its site, calling for input on 295 questions. The commenting process will not be speedy (although I guess 90 days is not that long to comment on 295 questions which I know all readers of this blog will want to do) but many argue this calculated approach for a financial innovation is best for the long run.
I will continue to digest the various regulations and their impact on entrepreneurship and hope that at least some of you will offer comments but here are some initial reactions from a handful of startup commentators:
We are getting into the act not a moment too soon. The practice of crowdfunding has already taken hold in other countries although governments, particularly in Europe, are all issuing regulations at a different pace. In the United Kingdom, the Financial Services Authority (FSA) authorized the selling of stocks through crowdfunding in 2012 and it continues to approve various platforms. The Netherlands and Denmark recently saw the launch of their first websites offering equity-based crowdfunding services, called “Symbid” and “Venture Bonsai,” respectively. France also allows equity-based crowdfunding, even accepting entrepreneurs from different European communities. Romania and Bulgaria skipped all the fuss in that they never had laws restricting or regulating equity-based crowdfunding in the first place. In Finland, legal issues seem to be more contentious around donation-based crowdfunding but equity crowdfunding is already a practice. In Europe overall, Italy has moved the most swiftly policy-wise, becoming the first country in Europe to adopt a complete regulatory framework on equity crowdfunding in July 2013. In Canada, Ontario is taking the lead as the Ontario Securities Commission announced in June 2013 that it was allowing an Ontario-only portal for accredited investors.
In terms of the developing world, the World Bank just issued a new report commissioned by InfoDev on the topic. The study projects crowdfunding in developing countries to reach $5 billion this year. The report called for the further study of appropriate regulation and investor protection in light of crowdfunding’s growing global popularity and democratizing effects on investment. In these countries, addressing policy issues in crowdfunding will inevitably involve deep non-financial reforms as well, such as intellectual property laws and contract laws. For these countries, the road to crowdfunding might be longer, but will bring positive spill-over effects on the entrepreneurship ecosystem overall.
We should all be cautious with how we spend our hard earned money. But while the SEC is probably right to start inexperienced, unaccredited investors with a $5,000 cap, I hope we all have more confidence in our fellow Americans and the new startups they develop than Lynn Turner, a former SEC chief accountant.
“What we are talking about are companies that in all likelihood are not going to be winners,” Turner told Businessweek in a phone interview. “And they are being invested in by people who clearly don’t have the expertise and financial smarts of venture capitalists.”
I am fine with putting a big warning to consumers on the homepage of crowdfunding sites that investing can be hazardous to your financial health, like we do on cigarette boxes—but come on, Lynn, let us not forget America was built by pioneers taking risks.
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