BY:Justin Clagette
After the economic crisis banks have been very hesitant to grant loans to aspiring entrepreneurs and small business owners. Crowdfunding is a popular technique that allows backers to finance for-profit or non-profit ventures. The Securities and Exchange Commission recently took a critical step in making securities-based crowd funding, which includes debt and equity exchange, a reality for aspiring small businesses. The SEC has proposed a set of rules called "Regulation Crowdfunding" that is in connection with Title III of the Jumpstart Our Business Act or JOBS Act which was signed into law in 2012. Traditionally crowdfunding involves a company offering advanced product or information releases, premium services in exchange for an investment. Regulation Crowdfunding would expand on these principles allowing companies to issue actual securities in exchange for an investment amount. This would be a substantial shift from what has become the familiar procedures found on websites such as Kickstarter which has claimed to have received over $1 billion dollars in pledges.
Title III of the JOBS Act, built on the previous regulations by adding the a new securities section, which addresses the transactions involving the offer or sale of securities by an issuer under certain provisions. This is a Securities Section that issues a relief from certain registration requirements set in place by previously established regulations for crowd funding transactions. In order for ventures to qualify for this exemption, crowd funding transactions by an issuer must meet the following requirements. These requirements can be found on the SEC website.
- In a twelve month period the amount raised must not go beyond one million dollars.
- The individual investments in a twelve month period are limited also to certain restrictions
- The greater of 2,000 dollars or 5 percent of annual income or net worth, that being if the annual income or net worth of the investor is less that 100,000 dollars.
- 10 percent of annual income or net worth that cannot exceed the amount of 100,000 dollars, if annual is 100,000 dollars or more. The amounts are subject to change every 5 years due to the inflation rate.
- All transactions are required to be conducted through an intermediary who must be either a registered broker or is registered as a funding portal.
- intermediaries that facilitate transactions between the issuers and the investors must provide certain information to investors and future investors.
The new rules proposed by the SEC are attempting to align the regulations of Section 4(a)(6) concerning transactions with the original concept of crowdfunding. The new rules would still require intermediaries to be present through all transactions but requires that all transactions be conducted through registered intermediaries on a website to make the offering more accessible to the general public. This would also allow members to share information and opinions about the transactions and intermediaries. Intermediaries would also have to provide some type of avenue of communication that provides information to those members of the crowd who potentially wish to fund a certain idea or business. Currently intermediaries must be registered as brokers, but the new proposed rules would allow them to organize the offer and sale of securities without registration. The proposed rules would require that certain information be provided to investors at various points concerning any offerings. This information should be made known through various electronic avenues such as filings with the Commission. Information required to be disclosed would include:
- Information about any officer and director as well as any individual who carries more than 20 percent or more of the company
- A business description as well as a description of the use of invested money from offerings
- The price of securities being offered, the targeted offering amount, the deadline to reach set amount, and whether or not the business will accept more than the targeted investment amount.
- The financial condition of the company
Companies would also be required to provide updates concerning the company's progress towards reaching the final offering amount.
The proposed rules will continue to allow individuals to invest subject into certain companies, and the amount of money that individuals could invest would still be limited to the stipulations put in place by the JOBS Act. There are certain companies that would not be eligible to use the crowd funding exemptions. These companies include those that are already SEC reporting companies, companies that are non- U.S., certain investment companies, and companies that have failed to follow the annual reporting requirement previously stated in the proposed rules.
The following videos explains crowd funding:
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The youtube videos that you posted with the blog really helped me to conceptualize what exactly crowdsourcing entails. From what I have read and seen in the videos, this concept will revolutionize the way we connect with businesses. Crowdsourcing will help small businesses connect with investors, think-tanks, and labor forces across the globe. I am very excited to see this idea blossom through the rest of 2014
ReplyDeleteThe SEC is proactive when it comes to issues they deem unethical. The registered portal use for transactions is justified because there was an old issue about that on the internet a couple of years ago. The entrepreneurial field in exploitative in nature so I like where this is heading.
ReplyDeleteI always been familiar with crowdfunding through donations and platforms such as gofundme.com where I see a majority of students seeking to raise money typically for tuition and study abroad trips. This blog post raised my awareness as a means to raise money for a business aside from donations. With the SEC taking a critical step in regulating securities-based crowdfunding, it demonstrates the growing popularity of the method for raising capital. I like the concept as an alternative towards raising capital versus taking a loan from the bank. This creates an opportunity for entrepreneurs to grow and develop there businesses. It also creates some transparency for investors to be more involved with a specific crowd-funding investment they are interested. Still, these investments are still very risky. I'm interested in the developments of the crowdfunding market in the future.
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