SEC opens door to start-up investing | Business News

SEC opens door to start-up investing

31 Oct 2015 | Author: | No comments yet »

5 things you need to know about crowdfunding investing.

If you’ve ever backed a project or business on crowdfunding sites Kickstarter or Indiegogo, you probably came away with some swag, a movie ticket or a discount on a soon-to-be-released product. (By Michael Erman) – U.S. securities regulators approved new crowdfunding rules on Friday, allowing start-up companies to raise money from mom-and-pop investors over the internet.Today, the Securities and Exchange Commission voted to enact a new set of rules about who can buy equity, or a stake in a company, through crowdfunding. The rules could be a boon for entrepreneurs looking to raise capital and a potential windfall — or loss — for investors hoping to be among the first to get a piece of the next Uber or Instagram.

Private companies were previously allowed to solicit only accredited investors – those with a net worth of at least $1 million, excluding the value of their homes, or annual income of more than $200,000. Described by supporters as an effort to “democratize” the investment landscape by allowing “mom and pop” investors far greater access – and at a much earlier stage than in the past — to the next potential Google (GOOGL) or Facebook (FB), there are also considerable risks attached. However, only four companies, including Equity Eats and MassVenture, have filed as intermediaries for small businesses to run a crowdfunding campaign. Investing in early stage startup companies has historically been viewed as an insiders’ game, with early stakes in the next big tech giant usually going to Wall Street insiders, hot shot “angel investors” or friends and family of the company’s founders.

I could see where there’s a company who comes on our platform, raises $1 million, and the next thing you know Facebook buys them for $1 billion.” That’s possible, but not the likeliest outcome. Since the crowdfunding rules were originally proposed in October 2013, the SEC has tightened limitations on how much investors can invest in these start-up companies. Dakin, who promotes access to capital in Colorado, said his team is working on a platform to make it easy for companies to crowdfund in the state and nationwide. “The larger challenge has been to accommodate a different style of investing that is lower in average dollar amount, higher in the total number of investors per raise, and with multiple additional reasons to invest beyond simple return on investment that are the deciding factor in making an investment,” Dakin said. “These challenges are not affected by use of either state or federal law.” Companies that crowdfund must file with the SEC or the state’s department of regulatory affairs. The new rules are part of the final phase of the JOBS (Jumpstart Our Business Startups) Act passed by Congress and signed into law by the president in 2012.

The new rule would allow anyone to invest as much as $2,000 or 5% of their annual income or net worth, whichever is greater, in small-scale fundraising projects of as much as $1 million in any 12-month period. Some critics warn that’s a recipe for trouble despite SEC vows to police the new marketplaces. “You can embezzle someone’s money in the guise of making a securities offering,” said Mercer Bullard, a law professor at the University of Mississippi. The Title III equity crowdfunding ruling that was approved Friday will allow non-accredited (mom and pop) investors to invest in crowdfunding offerings subject to certain limits and rules set by the SEC. The SEC also made changes to the audit provisions of the crowdfunding rule, allowing some companies raising money through crowdfunding for the first time to provide reviewed rather than audited financial statements. “I fear that many traps for the unwary are hidden in the regulations, creating potential nightmares for small business owners that fail to place regulatory compliance at the top of their business plans. Marks’ StartEngine Crowdfunding plans to register as a portal, as does Playa del Rey’s Crowdfunder, another platform that connects investors with start-ups.

The platforms themselves will need to apply to the SEC to be accredited, and the companies raising capital will be required to disclose their financial statements, details of how the funding will be used, and other information. The SEC included some revisions in the final rules to address the concerns raised by the crowdfunding industry following the issuance of its proposed rules two years ago. SEC Chairwoman Mary Jo White said before the vote that agency staff members “will begin immediately to keep a watchful eye on how this market develops.” They will assess what kinds of companies use the new crowdfunding offerings, how closely they follow the rules and whether the new practice promotes the raising of capital while also protecting investors. The commission said that its staff would continue to study whether crowdfunding investor protections are robust enough as well as the impact of the new regulations on capital formation.

Among them is an exemption from the audit requirements before fundraising for small first-time crowdfunding issuers, a step that would lower costs for such companies. As Catharine Clifford of Entrepreneur points out the SEC’s Commissioner, Republican Michael Piwowar, was the lone dissenting vote on today’s ruling. Piwowar is worried that the complicated new rules will bog down small businesses (and also pointed out that wealthy investors are now capped unnecessarily), as he explained in his dissent: The rules will spin a complex web of provisions and requirements for compliance.

For unproven startups, it offers a wider pool of investors beyond traditional venture-capital firms. “The level of scrutiny and due diligence in the crowdfunding market will likely be far weaker than the scrutiny applied by VC firms and sophisticated angel investors. Instead of being allowed to invest 10 percent, or $30,000, the retiree is now limited to $3,000. “I think it’s great,” Schwartz said. “Entrepreneurs could always use investment. For example, in Colombia, a real estate developer funded the country’s tallest skyscraper–now almost completed–using investments from 3,800 investors who bought their shares at roughly $20,000 a pop.

Instead, donors who gave less than $15 got “a sincere ‘thank you’ from the Oculus team,” while donors willing to fork over $275 got an unassembled prototype of the company’s Rift headset. And on the investor’s side, with the caps to protect people, I think there is every reason in the world to let people take the chance on what could be the next Facebook.”

While that model may end up spurring similarly successful projects in the US, it remains to be seen whether the SEC’s rules will prevent the kind of scams that have quickly taken hold in the less-than-secure world of online fundraising. The risks for inexperienced investors grows in backing small businesses and startups, too, said Boris Wertz, founder of Version One Ventures, which has an office in Palo Alto, Calif. He said that crowdfunding initiatives that fall under the new classification could attract the wrong type of investors from “people who compare investing in startups to investing in a mutual fund, which would have relatively guaranteed outcomes, when that is not the reality of startup investing.” Crowdfunding campaigns on Kickstarter and Indiegogo, which don’t accept equity, have helped countless small companies grow. JOBS Act rules already in effect have rolled back restrictions prohibiting companies from publicly soliciting funds from wealthy investors without the use of a broker. Venture firms don’t see threats from these types of smaller investors edging into their turf, said Mark Suster, founder of Santa Monica, Calif.-based Uprfont Ventures.

A separate report Friday from the Labor Department showed that wages and salaries rose 0.6 percent in the third quarter and were up 2.1 percent from the corresponding period last year. ● ederal regulators are proposing that the eight biggest U.S. banks build new cushions against losses that would shift the burden from taxpayers to investors. They also exempt firms raising $1 million or less in a year from having to provide financial statements audited by an independent auditing firm, which can be an expensive proposition. Under the Federal Reserve’s proposal put forward Friday, the mega-banks would have to bulk up their capacity to absorb financial shocks by issuing equity or long-term debt equal to prescribed portions of total bank assets.

Yellen, voted 5 to 0 at a public meeting to propose the “loss-absorbing capacity” requirements for the banks, which include JPMorgan Chase, Citigroup and Bank of America. ● Uber Technologies is making a retreat in Germany to the cities of Berlin and Munich as it grapples with a ban from using unlicensed cab drivers. Uber will for now suspend its ride-hailing services in Hamburg, Frankfurt and Duesseldorf, it said in a statement Friday, citing a difficult regulatory environment. The company in Germany has since limited itself to drivers that hold a passenger transport license through its UberX and UberBlack smartphone apps, but it has run into a shortage of suppliers of ride services. ● The Philadelphia Inquirer and its tabloid partner, the Philadelphia Daily News, will merge newsrooms but continue to put out two separate newspapers, leading to an unknown number of job cuts, the owner announced Friday.

Egger, in his first staff meeting since coming on board weeks ago, told employees the move to a single newsroom is designed to save Philadelphia Media Network $5 million to $6 million.

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