Although the SEC missed its deadline for the implementation of certain portions of the Jumpstart Our Business Startups Act (JOBS Act), there is renewed optimism that regulations concerning crowdfunding will begin moving forward with the relatively recent conformation of Mary Jo White to the SEC chair. Many believe that the transition at the top of the SEC has been a prominent reason why crowdfunding rules have been delayed.
Current Status of Crowdfunding
Crowdfunding is currently limited to a rewards system (where an investor receives a nominal gift or store discount in return for their investment), but the absence of rules has created pockets for a limited number of firms to operate. An example is Funding Community, which allows the public to offer small business loans totaling around $10,000 in return for a standard reward. The company receives a commission acting as a broker and avoids registering the loans as securities. Additionally, some states have issued their own legislation concerning crowdfunding. Both Kansas and Georgia have implemented crowdfunding laws, and North Carolina and Washington have recently introduced legislation concerning crowdfunding. However, it is yet to be seen whether these state laws will be preempted by or simply supplement federal regulations.
The Future Effects of Crowdfunding
Looking to the UK and Australia is a useful guide to predict the effects of crowdfunding for entrepreneurs and small businesses once the final regulations have been released.
In the UK, crowdfunding was approved around 2011 and allows for investors from around the world. Crowdfunding is regulated by the Financial Conduct Authority (formerly the Financial Services Authority), and the UK currently has more crowdfunding sources than anywhere else in Europe. Crowdfunding has been a huge success thus far, with more than one- billion dollars raised in 2011 alone, and has financed everything from small businesses to community projects like the local construction of bridges. England allows for three-types of crowdfunding: donation crowdfunding; debt crowdfunding; and equity crowdfunding. Furthermore, the UK’s leading crowdfunding businesses have joined together to launch a trade body, the UK Crowdfunding Association (UKCFA), aimed at providing clarity and consumer protection for the whole industry.
In Australia, crowdfunding that uses a reward system is not subject to regulation by the Australian version of the SEC. Australia allows crowdfunding for equity purposes, with a minimum of twenty persons needed to trigger regulation.
Regardless of whether the SEC and Financial Industry Regulatory Authority (FINRA) include additional regulations, crowdfunding is already being severely curtailed by the limitations put in place by the JOBS Act. Some of these regulations include: crowdfunding caps an amount an issuer can raise to $1 million in any 12-month period; shares issued in crowdfunding transactions are subject to a one-year restricted period; non-U.S. companies, public-reporting companies (other than “voluntary filers”) and investment companies (mutual funds, for example) are not eligible to crowdfund; and many more.
What can you do?
The JOBS Act created additional ways for businesses to raise capital, some which allows for more capital than could be accumulated through crowdfunding. If you are interested in raising money for your small business, there are other potential options currently available to you based on rules already in place under the Securities Act of 1933. Contact our office to discuss these options with our experienced attorneys. Additionally, entrepreneurs interested in learning more about becoming a funding portal can contact Larry Horwitz at firstname.lastname@example.org.