Crowdfunding is a popular internet funding mechanism that small businesses use to secure capital investment for various kinds of business opportunities. Until the Jumpstart Our Jobs Act (JOBS Act) in 2012 created an exemption to the Securities Exchange Commission (SEC) rules on registering securities, however, crowdfunding had not been used to buy and sell securities. SEC News and Developments headlines show a continued focus and commitment to crowdfunding. Read on to learn how the SEC continues to advance crowdfunding arrangements.
A Crowdfunding Agreement. The SEC entered into an agreement on February 17, 2017 with the North American Securities Administrators Association (NASAA) to share information between the two organizations. This agreement is well-timed as new rules go into effect to further crowdfunding opportunities within states as well as regionally. The agreement is a Memorandum of Understanding (MOU) between the SEC and NASAA and affects many state securities administrators represented by NASAA.
The SEC entered into the MOU with NASAA to strengthen the cooperation between state and federal securities authorities in the effort to help safeguard exemptions created under the new JOBS Act rules. Regulators intended the new crowdfunding rules would facilitate access to capital for small businesses while SEC continues to protect the investors and guard against fraud.
The JOBS Act. Title III of the JOBS Act created a federal exemption from the securities registration requirement. The exemption permitted the offering and sale of securities through the internet crowdfunding mechanism for companies in the early stages of development. The aim was to increase the access and efficiency of startup financing. Title III of the Act was ambitious because the crowdfunding provisions of the JOBS Act created a completely new public market for privately held companies which then required a new infrastructure for the new capital market. While there are other titles of the JOBS Act that deal with crowdfunding (Title II & Title IV), Title III is the latest one to be adopted.
SEC Regulations under the JOBS ACT. SEC issued proposed regulations in 2013 that would aide giving small businesses access to funding opportunities through the public marketplace. The proposed regulations included new infrastructure in the form of “funding portals”. These portals are not subject to the Financial Industry Regulatory Authority (FINRA) regulations applicable to broker-dealers. In practical terms, the funding portals are internet platforms that permit the buying and selling of securities without having to register with the SEC as securities brokers. The proposed regulations also included higher levels of disclosure from companies and caps on how much capital the law permitted investors to invest.
SEC adopted the final rules — known as “Regulation Crowdfunding” — in October 2015 and they went into effect on May 16, 2016. As of February 21, 2017, Regulation Crowdfunding had facilitated 21 funding portals, resulting in 163 deals initiated and 133 deals completed.
Fostering Crowdfunding Dialogue. To help move crowdfunding forward and increase participation from stakeholders, the SEC hosted a half-day crowdfunding symposium on February 28, 2017. The symposium was free and open to the public from 9:15am at SEC headquarters, 100 F Street, NW, in Washington, DC. Participants could attend in person or via a live webcast.
The symposium was a joint effort of the SEC’s Division of Economic and Risk Analysis and New York University’s Salomon Center. The symposium focus on capital formation combined with protection of investors.
SEC says the symposium helps to create a dialogue among regulators, investors, practitioners and members of academia about research, opportunities and challenges, and the effect that crowdfunding securities have on various market segments.
A recorded webcast of the symposium is available at https://www.sec.gov/dera/announcement/dera_event-022817_securities-crowdfunding-in-the-us.html.