Landmark vote on SEC Title III regulations met with positive feedback
After much hype and hope, the heart of the JOBS Act was finally brought to fruition today in a landmark vote by the Securities and Exchange Commission (SEC).
New rules around small business crowdfunding, mandated by the JOBS Act, have been met with positive fanfare in both legal and investing circles.
In an open meeting on Oct. 30, the SEC laid out a list of proposed requirements for both companies and individuals looking to participate in crowdfunding to raise capital.
A few highlights of the recommendations include:
A maximum amount of $1 million may be raised through crowdfunding offerings within a 12-month period
Individual investors with an annual income or net worth of less than $100,000 may invest the greater of $2,000 or five per cent of the lessor of annual income or net worth
Individual investors with annual income or net worth greater than $100,000 may invest 10 per cent of the lesser of annual income or net worth
Companies must file specific information with the Commission and make it available to investors, including: public pricing, company financial condition, financial statements, use of proceeds, officer and director information.
First-time issuers offering between $500,000 and $1 million may submit reviewed financial statements rather than audited financial statements.
Intermediaries in the form of funding portals or broker dealers must be used in crowdfunding transactions.
The proposed rules were enacted in a vote of three to one, and they will be made effective 180 days after being published to a Federal Register.
Industry insiders see the new rules as a step in the right direction, and a major turning point for startup investing.
“The Commission is a lot more comfortable with equity crowdfunding now than it was two years ago,” said Samuel Guzik, Founder of Guzik & Associates, Chairman and President of Crowdfunding Professional Association.
One of the most widely hailed surprises was the dropping of proposed full financial audit for companies using equity crowdfunding.
“Requiring a startup to spend tens of thousands of dollars on an audit made no sense whatsoever,” said Kendall Almerico, crowdfunding attorney and CEO of BankRoll. “This is great news for startups who want to use this law, but probably were never going to be able to use it if the audit requirement stayed in place.”
“Dropping of the audit requirements was something we had hoped for and something I personally testified to, and we were ecstatic to see that change,” echoed D.J. Paul, Principal at DJP & Co and co-chair of Crowdfund Intermediary Regulatory Advocates (CFIRA). “It will make a meaningful difference.”
Another point that was well received was a new rule allowing intermediaries, specifically investing portals, to hold equity stake in offerings in lieu of compensation.
“Previously we thought that ability in lieu of compensation was going to be limited to broker-dealers. That’s pretty huge,” added Mr. Paul. “That’s great alignment between intermediary and the investor.”
A recent study by massolution® found that worldwide crowdfunding platforms raised $16.2 billion in 2014, a 167 per cent increase from 2013, and that number is sure to grow exponentially in the coming years. Title III marks a promising step forward, and much-needed guidance and protection for both investors and issuers.
Other expert insights:
“Having Title III on the books and approved by the SEC is just a great thing for the industry because it allows unaccredited investors to participate in these small capital raises. What everybody has waited for and hoping for is that the rules would involve less hurdles that people would have to leap over and deal with.” – Scott Andersen, Principal at finLawyer.com
“This vote by the SEC to approve the final rules for Title III crowdfunding will prove to be the greatest advancement for entrepreneurship in a generation. Within the next five years, we are likely to see at least 20,000 new small businesses raise capital under these new rules. Currently on the StartEngine platform, we have over 30,000 unaccredited investors ready to participate and dozens of start-up growth companies ready to go on the day that the Title III rules go live.” – Ron Miller, Partner at StartEngine
“The approval of Title III of the JOBS Act in the United States is a landmark, and will finally allow ordinary Americans to support and invest in the businesses of their choice. What seems certain with this welcome news from the SEC is that equity crowdfunding is moving beyond the realm of “alternative finance” and going mainstream”. – Gonçalo de Vasconcelos, CEO of SyndicateRoom (press release)