A year and a half ago congress passed the JOBS Act (Jumpstart Our BusinessStart-ups) by an overwhelming margin. It was meant to supplant laws that are nearly eight decades old that limit the ability to invest in start-ups and small businesses to banks and wealthy individuals. At the signing ceremony President Obama said, “For the first time, ordinary Americans will be able to go online and invest in the entrepreneurs that they believe in.
The wheels of the federal government turned ever so slowly and now a key provision of the JOBS Act will finally fall into place. The SEC has lifted the ban on General Solicitation which means that companies can publicly advertise their fundraising efforts to accredited (high net worth) investors. It is expected that later this year the SEC will publish rules allowing non-accredited investors to participate as well.
Fred Wilson, a New York Venture Capitalist, registered his displeasure with the new rules in a recent blog post. He said, “If the SEC’s intention, with these proposed additional rules, is to neuter General Solicitation to the point that it is legal but nobody avails themselves of it, they will succeed.” In addition to precluding non-accredited investors, the SEC imposes a 15 day filing period before a company initiates its fundraising process, a formal filing of all marketing materials as they are updated, and penalties for rules violations that Fred views as non-starters.
He has a point but here are several reasons why in the end, it won’t matter. Crowdfunding, like so many new consumer behaviors spawned by the Internet, has significant organic momentum. Over a decade ago Napster enabled music fans to engage in the large scale sharing of digital music files. The music industry had no intention of giving up their CD business and used the laws on the books to try to beat back illegal music distribution. A decade later, like it or not, music companies are all in the digital music business.
Popular ideas find a way to navigate around established barriers. Kickstarter and Indiegogo pioneered the idea of donation-based funding, soliciting money in exchange for products, or rewards rather than an ownership stake. The Lending Club, Prosper, CircleUp and others have already built substantial businesses applying SEC work-arounds; using broker dealers and limiting participation to accredited investors as an interim solution.
Some forward looking state governments have decided not to wait for federal rulemaking and opened up alternative financing options for businesses and investors that reside within their state. Kansas, the first state to enact laws requiring the registration of sales of securities to the general public 100 years ago, turned out to be the first in the U.S. to enact an “intrastate” equity crowdfunding law. It was put in place by the Securities Commissioner of Kansas and essentially exempted sales of securities from state registration to an unlimited number of non-accredited investors.
The state of Georgia passed the Invest Georgia Exemption that provides even more freedom for crowdfunding than the Kansas exemption. North Carolina’s House passed a crowdfunding bill that is expected to move to the full legislature in an updated form and be signed into law next year. The state of Washington is currently teeing up crowdfunding legislation and other states will likely follow suit.
Expect the SEC to implement Title III of the JOBS Act with great fanfare early in 2014. This will allow non-accredited investors to participate in crowdfunding. The rules won’t be perfect as first written and over time they will evolve. But in the end it won’t matter. The crowd is already moving and will find a way.