Business owners and investors have been anxiously waiting for the SEC to finalize their crowdfunding regulations since the JOBS Act was passed in 2012. It has been two years and we are still waiting. In 2013, the SEC issued their proposed rules and we have reviewed them extensively on this blog. They covered everything from who can be involved, how much money can be raised, the amount individual investors can contribute and more. In total, the document is over 500 pages long. Since issuing the proposal, the SEC has been accepting comments from anyone related to the industry in order to get feedback on which part of the proposed rules to keep and which ones need adjusting.
The Proposed Rules Have Been Scrapped
Last week the SEC’s crowdfunding advisory board, a panel of 21 people, voted unanimously that they proposed rules do not meet the spirit or guidelines outlined in the JOBS Act. In other words, they need to be scrapped and the SEC must start again. Considering it took a year and a half to issue the first set of proposed rules this is not good news for the crowdfunding community.
Here is some of the feedback gathered from the advisory board:
- The rules need to be tightened. Barbara Roper of the Consumer Federation of America said that one of the concerns is investors putting money into start up companies that are traditionally the riskiest investment type.
- Hype. Ms. Roper was also concerned that the excitement created by crowdfunding campaigns would unnecessarily cause people to invest out of excitement.
- Cap investments. The committee wants to cap how much someone can invest in crowdfunding to the greater of their income or total net worth, excluding their home equity. The cap would be 5% for people with $100,000 or less in income or net worth and 10% for those above that number.
- Creation of online tools. They want the SEC to require an online tool to be established that would calculate people’s net worth or show them how to do so.
This group is made up of a diverse group of people with various view points on crowdfunding. Some, would prefer it didn’t exist while others are trying to open it up to the masses. Who will win and where the rules will take us is yet to be seen. The concern is that the rules become so cumbersome that they hurt the very people crowdunding is supposed to help.
Remember, crowdfunding is designed to provide businesses and entrepreneurs access to capital while providing regular people with the opportunity to participate in deals that they were previously shut out of. Crowdfunding is the great equalizer. With modern technology and progressive crowdfunding platforms companies don’t need to hire a team of lawyers or broker dealers to raise capital. This removes a standard barrier to entry they have faced with raising money through a PPM. Likewise, regular citizens aren’t prevented from being investors simply because they haven’t “made it” yet. The spirit of crowdfunding must be preserved in order for it to be effective. Something the crowd needs to keep in mind is the importance of speaking up in regards to their opinion on these pending rule changes. Otherwise, they are likely to lose.