The US Securities and Exchange Commission (SEC) has given a big boost to companies seeking crowdfunded investment – think Kickstarter but securities rather than physical stuff you buy. Organizations are now exempt from various regulatory requirements if they raise at most $5m, up from the previous cap of $1m.
The financial watchdog's commissioners voted 3-2 this week in favor of increasing the limit, among other changes to investment rules, and were split along party lines: the three Republicans on the panel backed the update, and the two Democrats refused. Their dissent was largely out of concern the changes would disproportionately benefit the rich.
Among the biggest changes were a 50 per cent increase in the annual limit on “Reg A+” offerings – basically a smaller version of going public with fewer required disclosures – from $50m to $75m, and the aforementioned massive jump in the cap on crowdfunding regulations from $1.07m to $5m.
However, there were also a range of other changes, such as allowing people to send more communications over possible future offerings in order to “test the waters” as well as run “demo days” – small in-person meetings that won’t count as official solicitations. The overall goal is to lift some of the complexities that can surround efforts to raise money from people over the internet, while hopefully still protecting investors and deterring fraudsters.
“These amendments will eliminate costs relating to paperwork and lawyer hours that as a practical matter serve no mission-oriented purpose and specifically do not enhance investor protection,” said the SEC’s chair Jay Clayton.
Rich gets richer?
The two dissenting commissioners said the end result was that the rich will benefit more from the new rules because it will put more money into private markets, where wealthy investors are courted and have better access to information, as opposed to public markets where companies are forced to disclose lots of information about their business and anyone can learn about and invest in opportunities.
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“The rule fails to address that in the private markets, the rich and well-connected typically have better access to the most promising companies, while retail investors get the leftovers,” said SEC Commissioner Caroline Crenshaw.
The fear about private versus public markets is not unfounded. In recent years, more money has been raised privately according to the SEC’s own figures: $2.7tn as opposed to $1.2tn in public offerings. The loosening of rules is likely to push that trend further.
However, the commissioners who voted in favor disagreed that it was a bad thing, and argued that private markets were more useful for small and medium sized businesses who don’t have the ability to go public and would benefit from simpler rules in private markets.
The impact on crowdfunding will be carefully watched. The current regulatory framework, created in the 2012 by the JOBS Act, allowed for up to $1m to be raised with comparatively few regulations and rules (at least compared to an IPO) though the main complaint against it has been that $1m isn’t enough money and may not be worth many companies’ efforts.
The leap to $5m will likely lead to a big increase in companies using crowdfunding to build their businesses. ®