With Federal Regulators Stalled, States Move Forward with Crowdfunding
While federal securities regulators continue to drag their feet when it comes to releasing final crowdfunding rules, states have taken it upon themselves to bring equity crowdfunding to their residents.
According to CrowdfundingLegalHub.com, the first quarter of 2015 has seen an explosion of intrastate legislation. As of early May, 21 states had filed proposed intrastate crowdfunding regulations and 19 states have enacted or have effective intrastate crowdfunding regulations, according to the site.
States are passing their own regulations as final rulemaking on the Jumpstart Our Business Statsups (JOBS) Act stalls at the federal level. The JOBS Act was signed into law in 2012, but three years after its passage final rules to enact Title III, which would enable companies to raise money from everyday investors, have yet to be been finalized by the Securities and Exchange Commission.
Today, equity crowdfunding sites that offer investment opportunities to accredited investors, or investors with a high enough income or net worth, have proliferated. And in March, the SEC moved forward with what is referred to as Regulation A+. Under Reg A+ the SEC adopted new rules for Title IV of the JOBS Act that allow start-ups to raise up to $50 million from accredited and non-accredited investors in an IPO. (Massachusetts has challenged Reg A+ and has filed a Petition for Review asking the courts to vacate the rule.)
But with mom-and-pop investors still largely excluded from participating in equity crowdfunding platforms until Title III rules are finalized, states have eagerly jumped in to enact rules of their own to encourage equity crowdfunding that is open to non-accredited investors.
Betting that their efforts will encourage the growth of small businesses and jobs, states such as Michigan, Alabama, Georgia, and Kansas have passed crowdfunding laws to allow companies based in their state to raise money from residents who live within their borders. Rules dictating how much money companies can raise and how much capital participants can invest vary by state.
This resulting state-versus-the-feds approach to equity crowdfunding brings to mind the patchwork approach we've seen when it comes to the recognition of same-sex marriage. In the absence of rules at the federal level mandating whether same-sex couples have a constitutional right to marry, states have moved forward on their own to either recognize or ban same-sex marriages within their borders.
The Supreme Court is now hearing arguments over whether states can define marriage as the union of a man and a woman, and whether the Constitution gives same-sex couples the right to marry. When it's handed down, the court's ruling could have broad implications for the nation and trump state rules that have been enacted on the state level.
The SEC has released a rulemaking agenda that indicates it will finalize Title III of the JOBS Act by October of this year. If the SEC sticks to that agenda it will be interesting to see what happens to the patchwork of intrastate crowdfunding efforts that are springing up and how they might need to change to conform to federal standards.
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