Regulatory Barriers Are Holding Back Investing And Lending Opportunities For Crowdfunding

BY John Berlau,  senior fellow for finance and access to capital at the Competitive Enterprise Institute.

In a recent Forbes column on the costs of regulation, my Competitive Enterprise Institute colleague Wayne Crews explains that, “businesses that never form in the first place because of regulation never get a chance to talk.”

But there may be an exception. Last week in San Francisco at the CFGE Crowdfund Banking and Lending Summit entrepreneurs, investors and policy experts came ogether to discuss what to do on behalf of businesses that can’t form because of the thicket of red tape. The conference, at which I was a keynote speaker, also featured Ron Suber, president of peer-to-peer lending site Prosper; Nikul Patel, Chief Product Officer of LendingTree; and prominent crowdfunding attorney and blogger Mark Roderick. One of the big ideas we discussed was how crowdfunding could open up new opportunities in investing and lending—if only some of the antiquated securities regulations holding it back could be trimmed.

When most people hear the word “crowdfunding,” they think of sites like Kickstarter and IndieGogo, where users can fund a new project and get souvenirs such as T-shirts or a sample of the product being funded. These innovations should be applauded, but they only scratch the surface of crowdfunding’s vast potential. Viewed broadly, crowdfunding could bring together investor and entrepreneurs, allowing them to bypass “middle men” such as Wall Street banks.

As I noted previously in Forbes, if a crowdfunding project currently were to offer funders a piece of the potential profits, instead of T-Shirts or other trinkets, it would run into a brick wall of Great Depression-era Securities and Exchange Commission (SEC) rules that subject a promise of a share of a business’s future earnings to regulation as a “securities offering.” As I explained:

[T]his would subject entrepreneurs making a simple pitch for funding movies or music to the panopoly of federal securities laws—including the behemoth Sarbanes-Oxley and Dodd-Frank laws—that publicly traded corporations must contend with every day at a cost of millions of dollars per year.

JOBS Act hasn’t done enough

The Jumpstart Our Business Startups (JOBS) Act, passed by Congress with bipartisan support and signed into law by President Obama in 2012, was supposed to change this. There has been some progress in allowing entrepreneurs more freedom to market to wealthy investors—but not nearly enough.

In September 2013, pursuant to the JOBS Act, the SEC repealed the decades-old ban on “general solicitation” of investors by private companies. Entrepreneurs have long been able to sell portions of their companies to wealthy “accredited investors” (currently defined by the SEC as those who make at least $200,000 a year or have a net worth of $1 million or more, excluding the value of their principal residences) without the mounds of red tape that go with taking a company public.

But they couldn’t do any sort of public communication, let alone advertising, in search of these wealthy investors. Now they can, and venues like AngelList utilize crowdfunding techniques to pair entrepreneurs with accredited investors.

Less wealthy investors, however, aren’t faring so well. Two-and-a-half years after the JOBS Act was signed into law, the SEC has yet to issue a rule implementing the Act’s Title III provision to allow very limited equity crowdfunding for the general investing public.

The good news is that entrepreneurs, investors and policy experts, like those who attended the CFGE Crowdfund Summit and will attend future CFGE events, are sharing practical ideas about how to merge crowdfunding with investing and lending, bring about the regulatory changes needed to bring new business ideas to life. Crowdfunding is a powerful tool for innovation and we shouldn’t be satisfied with a government that wants to hold it back.

 

GUEST POST WRITTEN BYJohn Berlau

Mr. Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.

 

http://www.forbes.com/sites/realspin/2014/10/24/regulatory-barriers-are-holding-back-investing-and-lending-opportunities-in-crowdfunding/

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