by David Drake
With a 3-1 vote on 30 October 2015, the Securities and Exchange Commission (SEC) has approved new rules that bring to effect equity crowdfunding. This approval makes the United States the second country to pass the law on equity crowdfunding in the world after Italy. The new rules were adopted by the SEC three years after President Obama assented to the Jumpstart Our Business Startups – JOBS Act, the legal framework that set in motion crowdfunding in the United States.
Regulation A+ enables small businesses and startups to crowdfund up to $50 million
Just as I had forecasted in December 2012, the equity-based crowdfunding law has come to effect over 1000 days after the enactment of the JOBS Act in April 2012. The approval of equity crowdfunding law under Title III of the JOBS Act came 8 months after the SEC approved Regulation A+ under Title IV. Regulation A+ enables small businesses and startups to crowdfund up to $50 million from accredited as well as non-accredited investors.
Non-accredited investors to participate in securities offerings
Companies can now give up securities valued at a maximum of $1 million each year via equity crowdfunding platforms under Title III rules. Like Regulation A+, the new rules open up the investing space, which previously was a preserve of only the super rich or accredited investors, to unaccredited investors. This will happen once the rules become effective in 2016. For entrepreneurs, this means a significant boost to their capital raising capabilities.
With this new regulation, capital raising and economic growth prospects can become phenomenal.
In September 2013, SEC did away with solicitations by private companies but allowed high net worth individuals with $1 million+ excluding private residences or persons generating a $200,000 annual income to invest and benefit. Prior to approval of Title III rules, most people, including those who have accumulated large amounts of money over time and capable of making sizable investments, could not participate in equity-based crowdfunding due to their inability to satisfy SEC’s definition of accredited investors. They were also viewed as persons who lack adequate investment knowledge to facilitate sound financial decisions irrespective of their ability to hire professional advisors. This created a gap between crowdfunding investors who can participate and the swelling number of crowdfunding platforms. With this new regulation, capital raising and economic growth prospects can become phenomenal.
Likely Impact of Title III Rule
I have been creating awareness about crowdfunding and tracking the growth of crowdfunding platforms since the enactment of the JOBS Act. I have also made an effort to document the revolution that crowdfunding is bringing about in the US and across the world. The 2015 Times Realty News Real Estate Crowdfunding Report provides an in depth analysis of leading and upcoming crowdfunding platforms in the real estate sector. There are more than 230 crowdfunding platforms dedicated to real estate in the world today. Based on the Democratizing Finance report released by DealIndex mid this year, equity crowdfunding grew by 410 percent from 2012 to 2015. The 2015 Times Realty News Real Estate Crowdfunding Report also shows an average annual growth rate of 135 percent in the crowdfunding industry annually and predicts that equity crowdfunding alone will raise $2.56 million in 2015.
This boost will encourage the emergence of more entrepreneurs who have disruptive ideas, leading to job creation
Although we do not expect to see a major shift in the way online investing is conducted after Title III rule takes effect, the rule will certainly enhance existing activities. This boost will encourage the emergence of more entrepreneurs who have disruptive ideas, leading to job creation. Non-accredited investors will bring in more cash into the economy, and properties will be funded by huge numbers of small investors. Raising capital will also take less time compared to the time it takes today.
Investor Protection Measures
The newly adopted Title III rules contain provisions that are aimed at protecting investors. Each individual investor is limited to making investments not exceeding $2000 each year or 5 percent of their net worth or yearly income if it adds to $100,000 or less per year, whichever is lesser in crowdfunding deals. Investors whose yearly income exceeds $100,000 can invest up to 10 percent of their net worth or income, whichever is lower but they cannot exceed $100,000 in investments per year.
There is a disclosure requirement on the part of company founders with respect to the financial position of their company and the securities offering under Title III rules. Companies seeking to sell securities to investors through crowdfunding by offering shares worth $500,000 to $1 million will be expected to make available reviewed financial statements as opposed to audited statements of account. The rules further provide a framework for regulating funding portals and broker-dealers that make crowdfunding transactions possible.
SEC’s chairperson, Mary Jo White says, “SEC has now completed the rulemaking process as mandated by the JOBS Act. The Title III rules along with other proposed amendments provide an innovate way for small companies to raise capital and give investors the much needed protection.”
SEC has made amendment proposals to Rule 147 of the Securities Act to modernize intrastate offerings as a way of advancing capital formation via intrastate crowdfunding. The proposal would further amend Rule 504 of Securities Act to raise the aggregate amount that can be offered and sold from $1 million to $5 million. To protect investors even more, disqualification of bad actors will also apply to Rule 504 if these amendment proposals are taken up.
The newly approved Title III rules will take effect 180 days after publication on the Federal Register. There is a 60-day period for the public to comment on the rules and proposed amendments after they have been published on the Federal Register. Registration of funding portals with SEC will begin on January 29, 2015. FINRA has issued 7 related rules and 4 forms that funding portals should familiarize with and will approve registration applications by 29 July 2015, six months later. Title III rules will become functional in 2016 Fall, 4.5 years after enactment of JOBS Act. Will FINRA’s related rules and forms speed up the law’s implementation or delay it?
Note: This article originally appeared on Accredited Investor News with this link http://accreditedinvestornews.com/will-finra-delay-or-speed-up-the-newly-approved-equity-crowdfunding-law-by-david-drake/ on November 20, 2015.
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and 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.