Crowdfunding is going to continue to explode in the near future. On March 25, 2015, the SEC adopted new rules to implement the provisions of the JOBS Act and Regulation A surrounding raising capital up to $50 million by smaller companies and, most likely, raise that money online on their websites or through social media. (The rules don’t go into effect until 60 days after they are published in the Federal Register and here is a copy of the rules and the SEC Press Release). The new changes have been called “Regulation A+” and hailed by many as significant improvements in giving smaller companies more access to capital.
There are requirements for certain disclosures and filings with the SEC as well as registration of the websites with the SEC as funding portals like a securities “broker-dealer.” There are also tiers for the companies that depend upon factors like the amount of money raised and state what the requirements will be for each tier. The end result is that you are going to see much more investment opportunities on the internet and social media geared towards everyday consumers without the requirement that they be classified by higher wealth or income as “accredited investors”, so caveat emptor and let the buyer beware!
For those who aren’t sure, what exactly is “Crowdfunding”? Most of the discussion in this area involves securities laws. When a company needs to raise money, they may offer an investment in the company by way of stock, LLC units, convertible debt, or other investments. These are all securities covered by US and State law and regulated primarily by the US Securities and Exchange Commission. The company does not need to be a publicly traded stock like a Facebook or Microsoft to worry about the SEC and state regulators. Any company or person offering or selling stock or other “security” can be subject to regulation. When companies want to raise capital without the expense of registering their stock with the SEC, they rely upon exemptions from registration. Most of those exemptions limit companies to seeking investors who meet the definition of “accredited investors.” These are basically people with over a $1 million net worth or whose income is over $200,000. Smaller investors are often kept out of these investments by rules designed to protect them assuming that they don’t have the financial savvy to protect themselves. Crowdfunding is an effort to raise money for a company or a cause from a large number of investors each investing a small amount of money. It was difficult to use crowdfunding to seek investors for a company if you were limited to only finding “accredited investors” and fall under an exemption from registration. The provisions of the JOBS Act and the rules that the SEC is issuing are meant to expand access to capital for smaller companies. Part of the provisions of the JOBS Act were to allow and expand the use of crowdfunding. Instead of a company raising $250,000 by seeking $25,000 each from 10 accredited investors, the company will now try to raise $250 each from 1,000 regular investors.
It is hard to know the future impact of crowdfunding and the JOBS Act’s attempts to increase access to capital due to many possible areas for possible fraud or misleading of investors. It looks like the SEC is going to keep a close eye on this topic and they are taking years to be sure the rules implementing the JOBS Act from 2012 cover all possible problems. We will have to wait and see the impact, but it seems like many smaller companies will be able to gain access to previously difficult to obtain capital.