Delay Continues on Crowdfunding Rules

With recent news that Richard Branson has thrown his support behind Indiegogo, there is a decent amount of mainstream attention to the topic of crowfunding. But while there is a lot happening on the policy front, things haven’t necessarily materialized as quickly as expected. Below is a quick rundown on developments on crowdfunding policy in the United States:

The Timeline

  • The Jumpstart Our Business Startups Act (JOBS) Act was signed into law on April 5, 2012, allowing small companies to raise up to $1 million a year through financial intermediaries from many small investors, without the expense of becoming publicly traded.
  • Titles I, V, and VI of the JOBS Act became effective immediately upon enactment.
  • In July 2013, the Securities and Exchange Commission (SEC) approved the lifting of the general solicitation ban, paving the way for the adoption of Title II. Since that date, allowing “emerging growth” companies are allowed to ask accredited investors for equity investments publicly (e.g., through social media) without having to register the shares for public trading.
  • The law called the SEC to have equity crowdfunding rules (Title III) in place at the beginning of 2013, but it only issued preliminary regulation in late October 2013 for the public to comment.
  • The 90-day comment period on the 585 pages of proposed rules ended on February 3, 2014.

The Stakeholders

  • The crowdfunding industry would like to finally begin selling stock in start-ups and emerging companies to average Americans. The industry includes crowdfunding platforms and the growing market of technological solutions to reduce investor risk (e.g. filtering and other analytical tools) and to solicit funds through social media.
  • Consumer advocates, such as the Consumer Federation of America, are concerned with the balance between investor protection and access to capital, as captured, for example, on limits on how much a person can invest in a year, based on income and net worth. They remind the SEC that most startup companies will fail.
  • Many startup entrepreneurs believe crowdfunding can improve their ventures’ odds by providing much needed seed capital and early customers who can validate their product or service, or provide feedback to improve their innovation. 
  • The authors of the JOBS Act, such as Democratic Senator Jeff Merkley, have urged the SEC to make the system “both simple and easy.” “Investors must also have confidence in what crowdfunding provides, or else they will not provide the capital into the market,” wrote Senator Merkley.
  • State and local policymakers are growing impatient in face of needs to boost economic growth, and we have witnessed state interest in intrastate crowdfunding as a tool. Since 2011, 11 states have legalized equity crowdfunding through legislation or regulatory action, while another dozen are debating crowdfunding-related bills. For more on state-level policy, click here.

Equity crowdfunding policies in other countries

  • The Australian Small Scale Offerings Board is a crowdfunding listing that has been service in business for over five years
  • Italy became the first country in Europe to adopt a complete regulatory framework on equity crowdfunding in July 2013.
  • In the United Kingdom, the Financial Services Authority (FSA) authorized the selling of stocks through crowdfunding in 2012, and it has continued to approve various platforms since then.
  • The Netherlands and Denmark launched in 2013 their first websites offering equity-based crowdfunding services, called “Symbid” and “Venture Bonsai,” respectively.
  • In Finland, debate is more contentious around donation-based crowdfunding. Equity crowdfunding is already a practice.
  • France also allows equity-based crowdfunding, and accepts entrepreneurs from different European communities.
  • In Canada, the Ontario Securities Commission announced in June 2013 that it was allowing an Ontario-only portal for accredited investors. 

Stay tuned for more updates.

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