by David Drake
By a two-thirds vote, the Securities and Exchange Commission (SEC) finally came to the decision to pass equity crowdfunding, otherwise referred to as Title III of the Jumpstart Our Business Startups (JOBS) Act, into law at a public meeting held on Friday 30 October 2015, more than 80 years after the SEC Act of 1933. SEC Chair White and Commissioners Luis A. Aguilar and Kara M. Stein voted favorably. The implications for this move are gargantuan, now that the market for equity investments has been opened up to non-accredited investors.
…first time investors would not have to undergo an audit and be subjected to its high costs…
In the opening comments by SEC Chair Mary Jo White, she stated “issuers conducting smaller offerings would not be required to file tax returns, as proposed, but rather would be required to disclose specific information from the returns, which should address privacy concerns raised by comments.” In other words, first time investors would not have to undergo an audit and be subjected to its high costs, but instead would be required to disclose certain financial particulars before they will be allowed to participate. This very issue was discussed at a CFIRA meeting I hosted in 2012. In that meeting, we have highlighted how we wanted to fall outside the jurisdiction of the 1940 Investment Advisers Act should we naturally disallow those offerings.
First meeting of Crowdfunding Intermediary Regulatory Advocates (CFIRA) founders with Financial Industry Regulatory Authority (FINRA) on 20 April 2012. From left to right: Vincent Molinari (Gate Tech), David Drake (LDJ Capital and The Soho Loft), Jason Best (Startup Exemption) and Sherwood Neiss (Startup Exemption)
Photo credit: The Soho Loft
More small business ventures will be funded thereby creating more jobs, and investors will be able to meet their funding needs faster since there is a wider network.
The JOBS Act was signed into law by President Obama on 5 April 5 2012. While Titles II (Regulation D 506) and IV (Regulation A+) were approved on 23 September 2013 and 19 June 2015 respectively, equity crowdfunding remained waiting in the wings. In September 2013, public solicitation by private firms was allowed, but only those individuals with a net worth of over $1M excluding their private residences were allowed to participate. Non-accredited investors with lower earning capacities and net worth were barred from participating since the general opinion was that they were not capable to make smart investment decisions. However, there are many individuals that had amassed small fortunes over the years, as well as pensioners that can make large investments but were unable to do so because legally they were not qualified by virtue of SEC standards. Despite this, the real estate market has soared under Regulation A+, with the potential for capital raising growing exponentially. After hundreds of letters later to the SEC expressing comments on the enactment of Title III, equity crowdfunding law has finally entered the industry landscape. Under Title III of the JOBS Act, entrepreneurs will have a wider pool of funds to tap as they dip into the pockets of the average citizen. More small business ventures will be funded thereby creating more jobs, and investors will be able to meet their funding needs faster since there is a wider network.
First meeting of Crowdfunding Intermediary Regulatory Advocates (CFIRA) with Securities and Exchange Commission (SEC) on 20 April 2012. From left to right: Vince Molinari (Gate Tech), Brian Meece (RocketHub), Douglass Ellenoff, hidden (Ellenoff Grossman & Schole LLP), D.J. Paul (Crowdfunder), Candace Klein (SoMoLend), Jason Best (Startup Exemption), David Drake (LDJ Capital and The Soho Loft), Chance Barnett (Crowdfunder), and Alon Hillel-Tuch (RocketHub)
Photo credit: The Soho Loft
The main focus of these organizations was to advocate for crowdfunding as a way to boost a reviving economy.
On 18 March 2012, one month before the JOBS Act was signed, I founded Crowdfunding Intermediaries and Regulatory Advocates (CFIRA) with Startup Exemption and Gate Impact, a branch of which being the CfRA (Crowdfunding Professional Association). The main focus of these organizations was to advocate for crowdfunding as a way to boost a reviving economy, and to that end, I started two online media publications, Times Realty News and The Soho Loft, to further educate the population on the then budding concept of crowdfunding. I have made efforts not only educate individuals on crowdfunding, but also to track the growth of the platforms as they emerged. The 2015 Times Realty News Real EState Crowdfunding Report gives insight into the top and emerging firms in the real estate crowdfunding industry. Now, some 1300 days after the JOBS Act was signed, equity crowdfunding has been given the green light.
Chance Barnett (Crowdfunder), Candace Klein (SoMoLend) and Richard Swart (UC Berkeley) before the first CFIRA meeting with SEC.
Photo credit: David Drake
Provisionally, crowdfunding platforms will be expected to comply with “funding portal rules” as well as the newly established rule 4518 which will help FINRA to accurately keep record of entities subscribing to Title III. The funding capability has been increased dramatically and so is the potential for fraud. There is the fear among some as they remember the great depression of the 1930s that initiated the creation of the SEC to govern securities. Blue Sky state laws had left many loopholes that were manipulated, leaving the market open and vulnerable to the beating it took. While this fear is reasonable, the market has evolved since that time and sufficient rules have been established to allow for a smoother transition. FINRA implementation of the law will delay its effectivity date, and we may have to wait till late spring 2016 before transactions can be done.
Many are optimistic that the full implementation of equity crowdfunding will be the turning point for alternative financing
The US finally follows Italy as the only two countries in the world with a specific crowdfunding law. A few days after the JOBS Act was enacted in December 2012, I pointed out that this equity crowdfunding law wouldn’t take less than 3 years to be approved. Now that this law has been adopted, there are many expectations within the investment community. No one can reasonably predict the law’s natural outcome, but the market is hungry for it. Many are optimistic that the full implementation of equity crowdfunding will be the turning point for alternative financing.
Photo credits (feature photo): demos.org
This article originally appeared on HedgeCo.Net on November 3, 2015: http://www.hedgeco.net/blogs/2015/11/03/us-leads-crowdfunding-for-equity-with-passing-of-final-law-of-jobs-act-by-david-drake/
David Drake is the Chairman of LDJ Capital, private equity advisory; Victoria Partners, a 110 family office network; Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications, Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.