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The Securities & Exchange Commission Speaks On Crowdfunding
Read this article in PDF form here.
In 2012, the Jumpstart Our Business Startups Act (JOBS Act) was signed into law to “increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.”
A key component of the bill was the establishment of formal regulatory rules for raising capital through the increasingly popular “crowdfunding” platform. The bill directed the Securities & Exchange Commission (SEC) to write the rules for the regulatory structure of crowdfunding. The proposed rules, which had been delayed for over a year, were finally released on October 23, 2013. The rules are 585 pages long and will be open for public comment through February 3, 2014.
While many key stakeholders had actively engaged with the SEC in advance of the release of the proposed rules, these rules were met with mixed reviews. Groups such as the Consumer Federation of America were hoping that the proposed rules would protect investors more. The CEO of crowdfunding site Indiegogo felt the new rules were over-burdensome and would negatively impact young companies. However, the CEO of crowdfunding site RocketHub said he would reserve judgment until the rules were ironed out. He believed that if some of the fees were smaller, crowdfunding would still be viable; if the fees were high, a traditional bank loan would be a better option.
The NASE supports accountability on the side of businesses seeking funding and the sites hosting these avenues for funding. Additionally, we recognize that it is also important to have some protection for the investor in the regulations. However, we remain concerned that the proposed rules may have gone a little too far, as is seen in one of the new regulations requiring a company seeking crowdfunding to file annual reports until one of three criteria is met. These criteria are:
1. All of the crowdfunded securities
are purchased.
2. The company goes public.
3. The company is shut down and dissolves.
Adding to the burden of small business owners is a requirement for at least two years of financial statements and most recent tax return of the principal executive. If the crowdfunding funds raised reach certain levels, the burden grows as accounting audits are required. Crowdfunding has proven to be a great resource for small businesses looking to grow and a great opportunity for small investors.
We will continue to monitor the conversation, but we hope the SEC realizes that over-burdening and regulating these small businesses and crowdfunding sites is a great disservice to the small business community.