Most Dramatic Change In Securities Laws in 80 Years

Posted on Thursday 5 April 2012

The Jumpstart Our Business Start-ups (JOBS) Act was signed in to law today by president Obama.  It has multiple components and covers start-ups to companies with just under $1 billion in revenues doing initial public offerings (IPOs).  There will be rule making by the SEC so some parts of this, like equity crowd funding, will not go into effect until 2013. For a good overview summary go to the Cutting Edge Capital Blog Entry.

The equity crowd funding component, Title III, is the most revolutionary.   It will allow small companies to sell up to $1 million in stock to non-accredited investors through intermediaries, i.e. crowd funding portals.    The original House version especially was innovative relying on the judgement of social networks to vet deals while keeping investment amounts low and bureaucratic paperwork and its costs down.   The Senate amended Title III to create more protections for investors.   Securities attorney William Carleton described this as “taking the crowds out of crowd funding”.

As of this writing many people have not taken the time to study the regulatory burdens and costs that this will add.  I estimate that between legal fees, accounting fees, and insurance; it will cost $100k before you raise any money.  With a max of $1 million that you can raise, and with the need to have the cash up front, many start-ups may not want to go this route.   I hope I am wrong.  We have 9 months for the SEC to make rules, and the crowd funding intermediaries may be able to come up with a way to lower the costs of compliance. There is also a new “self-regulating organization” the Crowd Funding Regulatory Association forming up to provide an alternative to FINRA, the Wall Street fixture.

One platform, Funding Launch Pad has read the amendment and has a detailed analysis of the requirements for equity crowd funding – see this link

In the mean time, and I think maybe growing in importance and here to stay, is the donation and advanced sale model of crowd funding represented by Kickstarter, Indiegogo, and several hundred others.

Less overtly revolutionary, but with more immediate and significant impact with be effects on accredited investors or angels.  Title II of the JOBS Act removes the prohibition against public solicitation when raising money from accredited investors (those with more than $1 million in net assets, or earning on average more than $200k a year) using the SEC’s Regulation D to not have to through a securities regulation process  with either the Feds or the State.   This will dramatically increase the transparency of private investing and be a great source of community learning for all including entrepreneurs, and non-accredited investors, as well as accredited investors.  Non-accredited investors will be able to observe all of this, even if they can’t invest.  In the past all of this was behind closed doors.

The Friends of the Hawaii Local Exchange that have been researching bring back community exchanges will probably start by doing crowd funding with accredited investors only.   We will also direct people in the beginning stages to other community resources and to the donation/advanced sales crowd funding sites.   After we get this initial focus right, we will then want to seriously see how the equity crowd funding intermediaries are doing and consider adding that component.

We are a ways from achieving the the kind of democratizing of capital that we would like to see and be a part of, but the JOBS Act is a start in a shift of focus from Wall Street to Main Street.

Unfortunately, a big part of the JOBSAct, Title I in particular, which defines “emerging growth companies” as a company with less than $1 billion (yes with a “b” in revenues) and relaxes regulations as part of doing Initial Public Offerings is actually all about Wall Street and the big finance casino game.  This is what has the ire of many on the left like Sen. Bernie Sanders.  Too bad they are using this brush to tar the dramatically smaller scale, decentralized, crowd funding and angel investor reforms.  An interesting blog post that provides some perspective on this is Darrell Delamaide’s Political Capital column at Market Watch.  Also Amy Cortese’s blog post which is quoted in the former.