The JOBS Act – An Industry Awaits the Rules
With the clock ticking down on 2014 the alternative asset industry is waiting to see if the JOBS Act waiting game will drag on into 2015.
It’s been more than two years since the Jumpstart Our Business Startups Act was signed into law. By changing securities rules to allow private companies to openly solicit individuals, the law’s implementation sparked a surge of new crowdfunding platforms.
But the JOBS Act remains one of the more important discussions taking place in the industry today because it has yet to be fully implemented. Parts of the law, including Title III which surrounds the crowdfunding industry, have become bogged down in rulemaking proceedings with the SEC.
Frustration with the delay can be tracked on Twitter by following the hashtag #ReleaseTheRules and more than dozen states have enacted crowdfunding rules of their own in the absence of definitive action from the SEC.
The industry was hoping the SEC might reveal its rules late last month, when SEC commissioners were scheduled to speak at a meeting on small business capital formation. But the meeting came and went, and no rules were released. Recent industry chatter has said the rules may be released in the coming days, while other reports say it might take until 2015 to see any real action.
What is the industry waiting for rules on? Here are two big issues:
- Accredited Investors: In the past, investing in private deals was pretty much a closed club, where you needed to know someone tied to the deal in order to participate. But the JOBS Act lifted the general solicitation ban, meaning private companies and startups can now advertise publicly through avenues like crowdfunding platforms or social media. But currently, participation in these deals is limited to accredited investors – meaning an investor has to have a net worth greater than $1 million (excluding the value of their primary residence) or earn an individual income of $200,000 a year or more.
The industry is waiting to see if crowdfunding will be opened up to the general public – not just wealthy investors. Under proposed rules for Title III of the JOBS Act, companies could raise capital from the non-accredited investors through online portals. But the amount raised could be limited to $1 million for a 12-month period and financial disclosures might also be required.
Startups, entrepreneurs and crowdfunding platforms are eager to find out if they will be able to solicit an entirely new category of investor. Proponents of expanding access to include non-accredited investors believe crowdfunding could help stimulate job growth in the United States by making it easier for small businesses to raise capital. Opponents worry that unsophisticated or inexperienced investors could be exposed to fraud or not fully understand the risks they are taking. Either way, the industry is eager to find out what the do’s and don’ts will be when it comes to the type of investors they can solicit.
- Funding portals vs brokers: Since the JOBS Act was adopted, a number of crowdfunding platforms have launched. But to legally sell securities, these platforms have registered with FINRA as brokers or partnered with broker-dealers.
If Title III of the JOBS Act is implemented, crowdfunding sites would have the option of choosing to register with FINRA as either a traditional broker-dealer or a “funding portal.” A funding portal would be subject to FINRA’s oversight, including enforcement, and it would also need to receive permission from FINRA to operate a funding portal.
The idea behind the funding portals is that they could possibly be a lower-cost option for small businesses to sell securities to the public. Broker-dealers take a commission, charging companies that are raising funds a percentage of the amount they are raising. While funding portals would be allowed to do the same, they might not take a commission or choose to take a lower one, which could decrease the cost for investors participating in crowdfunding.
It remains to be seen how businesses will proceed once new rules are released. Given the extended delays, many in the industry are simply eager to see the finalized rules so they can adjust their businesses accordingly. Even if the rules are revealed in the final days of 2014, there will be a lag for them to be implemented, meaning their impact is something we’ll be continuing to track closely in the New Year.
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