The SEC has, at long last, issued final rules on crowdfunding under Title III of the JOBS Act, issuing a press release with fact sheet and a long final rule release. The rules will become effective in the middle of next year. These rules are likely to transform the manner in which small businesses raise capital. The following are some big picture points about Title III crowdfunding to keep in mind, some of which I’ve written about in the past:
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The pending SEC rulemaking on equity crowdfunding took its turn in the spotlight, as the subject of this Sunday New York Times editorial. Generally speaking, the piece exhibits the same paternalism regarding the concept of private company investing by non-accredited investors that is widespread. I want to focus here on the portion of the editorial that notes that crowdfunding participants will generally not be expected to receive special rights associated with institutional investment:
And under the proposed rules, investors could end up with next to nothing even if they invested in the next big thing. Sophisticated investors often negotiate complex terms to ensure that they are amply rewarded for early-stage investments, even if later investors put up more money. The S.E.C. has acknowledged that everyday investors “might not” be able to negotiate the same terms — which include “anti-dilution provisions,” “superior liquidation preferences” and other arcana. But its proposal only requires companies to disclose how early investments may be “limited, diluted or qualified.” It should instead require that shares issued through crowdfunding incorporate the terms that sophisticated investors routinely demand.
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The SEC has, at long last, issued its proposed rules on crowdfunding as mandated by the JOBS Act. It is a massive, 585-page behemoth. If you’re pressed for time, here is the SEC’s press release with a handy fact sheet.
I wrote about the SEC and crowdfunding a few weeks ago, noting the SEC’s apparent hostility to the concept and the paternalistic attitude toward non-accredited investors underlying it. Now we have the proposal, and the SEC has apparently held its nose and essentially proposed the framework as contemplated by the JOBS Act. Nothing is final until the SEC receives comments and issues a final rules release, but it appears that crowdfunding will get its chance to prove the doubters right or wrong.
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One of the provisions of the JOBS Act that has many in the investment community excited is the new crowdfunding exemption to the registration requirements. When effective, these offerings will permit sales of securities to anyone – not just accredited investors – for up to $1 million in the aggregate in each 12 month period. This represents a radical democratization of private offerings, which currently are, for the most part, marketed just to the wealthy. The SEC, however, does not share the private sector’s enthusiasm and has seemingly been slow-walking its efforts to enact rules that are required before these offerings can be introduced.
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