This is the second blog post in our series about new federal regulatory initiatives in the first half of 2014.
The U S. Securities and Exchange Commission has issued a notice of proposed rulemaking that will help implement a new law that permits “crowdfunding” on a limited basis for the sale of securities.
Under Title III of the Jumpstart Our Business Startups Act (JOBS Act), crowdfunding is now permitted under some circumstances for stock offerings in the amount of $1 million or less. The JOBS Act creates a new Section 4(a)(6) of the Securities Act of 1933 to deal with crowdfunding, and the new rules would govern the sale and offering of securities in that manner.
Crowdfunding is an evolving method of raising capital that has been utilized from time to time to raise funds through the Internet for projects ranging from innovative product ideas to artistic endeavors like movies or music. Previous US crowdfunding efforts have been non-equity based, with funders essentially loaning capital or making donations in exchange for rights to loan payments or perhaps acquiring “perks” (a T-shirt, concert tickets, etc.). Title III created a securities-law exemption so that this funding method can be used to offer and sell securities as well.
The reason that crowdfunding had not been used in the past for stock offerings was the understandable legal concern that offering a share of returns from business activities could trigger the application of federal securities laws. The JOBS Act created an exemption from securities laws for crowdfunding, and is designed to relax various federal regulations and to eliminate the application of state securities laws to the offerings. The intent is to encourage small investments by large numbers of individuals in small businesses and startups. In the JOBS Act, Congress wished to facilitate the raising of capital by small businesses while providing meaningful investor protections at the same time.
The goal of crowdfunding — to provide individuals with a more direct role in supporting and growing the economy, and to channel funds to the (small) business sector that creates some 75% of the net jobs in the United States – is laudable. Its implementation, however, is complex, and a lot remains to be done. The exemption won’t take effect until the SEC puts the new rules into final form. The SEC must then “roll out” the new regulations, and educate the investing public and their advocates. Some thoughtful critics, such as the American Association of Retired Persons (AARP), fear that Title III will open the floodgates to scam artists seeking to separate ill-prepared individuals from their money. Others are wary that some potential participants, including minority brokers, may be marginalized while “old boy networks” benefit disproportionately.
O’Riordan Bethel’s Carol O’Riordan recently was privileged to join the U.S. Black Chambers, Inc., Women President’s Educational Organization – DC, Women Impacting Public Policy and more than a dozen other representatives of the minority-, women- and veteran-owned business community in the first of a series of SEC focus groups on the JOBS Act and Crowdfunding. The focus group, convened by SEC’s Director, Office of Minority and Women Inclusion (OMWI), focused on gathering thoughts and ideas regarding roll-out of the regulations and education of the investing public and the businesses that are the planned beneficiaries. We are honored to have the opportunity to participate and will keep you posted on new developments.
