The JOBS (Jumpstart Our Business Startups) Act signed by President Obama on April 5, 2012, had six underlying bills and Title III is about crowdfunding. The Crowdfunding Bill was initially expected to become law in January 2013 but it was heavily delayed at the SEC due to prolonged discussion and review to ensure investor protection. After 18 months, the SEC submitted its proposed rules for public comment on October 23. It will be a long and arduous task for CFIRA (Crowd Fund Intermediary Regulatory Advocates) and the public to address and distill the 295 questions on the 585-page proposal and submit their comments.
After the long wait for the benefits of this Act to come to fruition, we are eager to see how the new law will pan out and create more opportunities for the startup community.
Douglas Ellenoff of Ellenoff, Grossman & Schole, LLP, has been with CFIRA since the beginning and has clearly become the leading counsel on this Act. Now regularly making presentations nationwide and in Washington on this topic, Douglas shared with us the fine details and intricacies of this new US crowdfunding law in the making.
David Drake: What are some of the most challenging questions that come to mind about the regulations?
Douglas Ellenoff: Although it is often lost on many crowdfunding enthusiasts, this new means of raising capital remains a sale of securities, and consequently, regulatory costs and burdens will be incurred by entrepreneurs availing themselves of Title III. I trust that clever technology entrepreneurs will address this issue and, along with market forces, drive down the expense of compliance.
David Drake: What should intermediary platforms be careful about regarding this potential new law?
Douglas Ellenoff: The SEC has sought to clarify, and I believe change, the express structure of Title III and impose a specific responsibility and liability on the funding platforms for the disclosure of the entrepreneurs.
David Drake: You were very optimistic in the past that this was a great capital formation regulation for small and medium-sized firms in America – bakeries, restaurants – that have a local community supporting their business. What firms benefit the most from this law?
Douglas Ellenoff: Communities throughout the US, as well as women and minorities will benefit from crowdfunding.
Drake: You represent dozens of firms in the crowdfunding space. How do you see the industry, and the companies in this space, evolving over the next 18 months?
Ellenoff: I believe that, as with online shopping 10 years ago, the sale of securities through crowdfunding portals will become increasingly commonplace and accepted as the norm.
Drake: What trends do you see in the next 18 months in crowdfunding, accredited crowdfunding and business angel networks?
Ellenoff: The biggest trend will simply be acceptance of the notion of crowdfunding, along with hybrid offerings.
Drake: Any wise words to share to the readership?
Ellenoff: The purchase and sale of securities is not a fad, and neither entrepreneurs nor investors should participate in this industry lightly. We need highly motivated and informed market participants to avoid unreasonable expectations. Raising funds is difficult at any time and this isn’t a magic bullet; making money isn’t easy in the private or public markets.
We have to keep in mind that this law has its limits and many questions are challenging. Simply having to do criminal background checks can make this law useless if each up front cost is in the thousands. The public commenting is utterly important now. We can expect a functional law as early as next summer.