US SEC approves new crowdfunding rules

31 Oct 2015 | Author: | No comments yet »

5 things you need to know about crowdfunding investing.

For years, artists, charities and entrepreneurs have used the power of the Internet to generate money for projects. (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. 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. The new rules, which are part of Title III of the JOBS Act, make it possible for anyone to buy a piece of a company in exchange for money–aka “equity crowdfunding.” But while many crowdfunding advocates are celebrating the new rules as a revolution in their business, there’s still reason to be skeptical about how well they protect small investors.

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. The possibility of ordinary investor participation in equity-based crowdfunding began with the passage of the 2012 Jumpstart Our Business Startups Act, or JOBS Act, which aims to help startups and small businesses to raise capital from a wide range of potential investors. 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. The new SEC rules won’t prevent the types of fraud that can arise in conventional online scams, said Mercer Bullard, a law professor at the University of Mississippi who is a mutual-fund investor advocate. 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 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. 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. 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 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.

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. Lisa Fetterman, the founder and CEO of cooking equipment startup Nomiku, sees a potential opportunity — “because banks aren’t going to give you money,” she said.

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. The company sells machines for sous-vide cooking, a sort of vacuum method meant to cook evenly and seal in moisture, to both home cooks and restaurants. 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. 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. 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. 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.

You have more pond to fish in now,” said Hitomi Kimura, a co-founder of DinersCode, which sends customers to Manhattan restaurants by offering free drinks, perks and discounts for frequent diners. 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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