SEC opens the door to startup investing

31 Oct 2015 | Author: | No comments yet »

Crowdfunding 2.0: SEC just made it easier to buy shares in start-ups.

Americans have a chance to invest in small companies and startups. 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. While the new rule gives individual investors more access to promising young companies — traditionally a playground for venture capitalists and wealthy investors — critics said it also exposes less sophisticated investors to greater risks with few protections. “People don’t understand that they can’t just invest like Mark Cuban on ‘Shark Tank,’ ” Matt Milner, co-founder of crowdfunding research company Crowdability, told The Post. However, only four companies, including Equity Eats and MassVenture, have filed as intermediaries for small businesses to run a crowdfunding campaign. 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.” The U.S. law limits a company’s crowdfunding to $1 million a year. But the North American Securities Administrators Association urges caution to those thinking about giving their money to a startup. • Wait: The rules won’t go into effect until sometime next year, and the exact date is not known. 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 offerings can be made only through brokerage firms or new Internet funding portals that must be registered with the SEC, a requirement aimed at protecting investors.

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. Some 50 percent of small businesses fail within their first five years. • Research: The SEC is requiring the small companies that are crowdfunding to provide financial statements. 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.

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.

As Catharine Clifford of Entrepreneur points out the SEC’s Commissioner, Republican Michael Piwowar, was the lone dissenting vote on today’s ruling. Check who they are and their track record with past businesses. • Investments may be long-term: Know that you may be stuck with an investment for a long time. 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. 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.

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.” 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. 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. 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.

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. 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 Düesseldorf, it said in a statement Friday, citing a difficult regulatory environment.

The company in Germany has since limited itself to drivers who 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. The SEC was given some discretion in the 2012 law, known as the JOBS Act, in the information to be demanded from companies and limits imposed on investments. 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. Republican Commissioner Michael Piwowar voted against the crowdfunding initiative because he said the new rules were too strict and will discourage many companies from participating.

Waiting at the starting gate for the final rules to take effect: legions of startups in areas such as packaged food, medical and biotechnology, restaurants and real estate. Investors may be on their own to pursue private lawsuits against companies when things go awry, and it may be difficult or impossible to resell the securities.

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