SEC Approves Final Crowdfunding RegulationsNovember 4, 2015
On Oct. 30, the Securities and Exchange Commission (SEC) voted 3-1 to approve the final crowdfunding rules. The long-anticipated rules were promulgated in accordance with Title III of the NSBA-supported Jumpstart Our Business Startups Act (JOBS Act), which President Barack Obama signed into law in 2012. The vote was split along party lines and the rules were the last portion of the Jobs Act to be finalized. The regulations will go into effect 180 days after the final regulations are published, and the first offerings under crowdfunding regulations are not expected to be until mid-2016.
The regulations will allow small businesses to raise up to $1 million per year, through intermediaries facilitating the crowdfunding transactions. The regulations create a framework both for the companies seeking to make an offering and the intermediary through which the offering ultimately is made. While the new rules do allow average Americans to engage in the crowdfunding, they will not have unfettered access. According to the regulations, an individual investor may not contribute more than $100,000 in any 12 month period across all crowdfunding offerings. However, the vast majority of Americans will face limits much lower than that, dependent largely upon their income and assets.
Under the regulations, all crowdfunding transactions would need to take place through an “SEC-registered intermediary,” a broker-dealer or a funding portal. These intermediaries will be required to provide information to potential investors, take measures to reduce the risk of fraud, develop systems to ensure investors are not investing more than they are allowed to and develop systems to ensure that offering companies are complying with all relevant regulations. Furthermore, for a company to even make an offering through one of these intermediaries it must first comply with several provisions in the finals rules. Companies are required to disclose financial statements, target information about the offering, and information about what the business plans to do with funds raised from the offering.
The draft regulations were released over two years ago, and were met with considerable skepticism at that time. However, after evaluating comments on the proposed rules, SEC did make several changes from the draft. Under the final rules, intermediaries will have the power to vet companies and decide which may make offerings using the portal, a change that the SEC thought would provide an extra level of protection for investors. Also under the final rules, companies may pay the intermediaries for their services through ownership shares in the company. Perhaps most importantly, under the final regulations, companies do not need to provide audited financial statements prior to their first offering raising from $500,000 to $1 million.
Title III of the Jobs Act was intended to open up investment in small private companies to a much larger number of Americans than it has been in recent memory. Prior to the passage of the Jobs Act, only accredited investors (usually high income or net worth individuals) were allowed to invest in private companies. The SEC estimates that only around nine percent of Americans households are considered accredited investors. This regulation could therefore open up over 90 percent of American households to this type of investment, vastly expanding the capital available to small businesses.
Capital formation continues to be difficult for many small businesses. In a recent survey, 31 percent of NSBA members indicated that they are currently unable to access financing. Access to financing and capital is essential for small businesses to grow and create new jobs across the country. NSBA supports the continued expansion of financing and access to capital to small businesses and is eager to work with both the public and private sectors for new and more streamlined approaches to accomplishing that goal.