To probe the legal intricacies revolving around the JOBS Act and how these new laws might impact the crowdfunding scene in the next months leading to and right after the much-anticipated full implementation of crowdfunding for equity, David Drake spoke with Scott Purcell, CEO of Arctic Island.
Drake:Scott, you are a co-founder of the leading organizations in crowdfunding and have taken a leadership position on crowdfunding for equity in the US. The law is changing through your work with us. The US is the first country in the world taking a leadership position and changing the law for crowdfunding. This is a momentous change in how capital flows. How do you feel about the progress the crowdfunding for equity portion of the bill this has taken to date?
PURCELL: All entrepreneurs wish others would move as fast as they do. The fact is that regulators have a process which they must go through, both internally and public comment periods, and it just takes awhile. Congress moved incredibly fast, by their standards, but still took a year. We now have the SEC and FINRA adapting 80 year old laws that have had almost no changes to keep up with the internet age. So sure, I’d like it to go faster. But I have spoken with many people at the SEC and FINRA and know they really are committed to getting this done, so I can have some patience.
Drake: What would you like to see change in the progress to implement the law and what can the readers do to help?
Scott: I’d love to see regulators post a blog or other updates on where they are internally, as well as some projected dates as to when proposed rules might be issued, the comment period for those rules, and the time from that to final rules. I think this kind of communication would help the industry and the media calm down and give the regulators some breathing room. Imagine a road construction project you pass every day, and how much better it would be if there was a sign (from the construction company) with an estimated completion date.
Drake:Scott, what will be the impact on the US when crowdfunding for equity becomes legal?
Scott: It will change the world. Yes, literally. Crowdfunding for securities (debt will be MUCH larger than equity) will enable millions of businesses to get the capital they desperately need to grow and create jobs. This will usher in a boom period the likes of which this country, and the world, has never seen.
Drake: When will crowdfunding for equity become legal in the US?
PURCELL We expect that 506(c)-D, which I refer to as “crowdfunding for rich people”, will be allowed sometime around the end of this year. Crowdfunding for regular folks like you and I will probably be approved sometime in mid-to-late 2013 (keep in mind that even after the SEC issue rules, FINRA then has to take up the process of making their rules).
Drake: What’s your response to reports Mary Schapiro of the SEC will step down after the election?
PURCELL Crowdfunding is the will of the people. It’s perhaps the only legislation in the last decade that passed with massive bipartisan support. So I don’t think it’ll matter to the process who is in charge. The “staff” (people who work at the SEC) are all excited about it, they get it and see how it’ll affect their friends and families just like the rest of us, and they continue to be heads-down on this regardless of who’s in charge at the Commission.
Drake: What’s going to be the total cost for issuers to do crowdfunding for equity when it is legal?
PURCELL Nothing is free, and there are costs associated with raising money. There will be some costs to get the offering started, such as putting your business plan and financials together (which you can do yourself), having a lawyer customize the investor agreement and guide you on your deal structure…maybe somewhere between $1,000 – $3,000 in upfront costs. Then the portal and/or brokers who help get your deal funded will charge nominal upfront costs (e.g. fees associated with background checks and setting up escrow) and get a success fee of around 8% or so. So it’s not free, as people have to get paid for the work they do, but it’s going to open up capital markets and make things much more efficient and less expensive than they’ve been in the past.
Drake: How will Fortune 10,000 companies get involved in Crowdfunding for Reward?
PURCELL What might be interesting is to see large companies sponsor the fundraising of small businesses. Perhaps, say, Ford pitches in some special rewards for people helping fund a company in their supply chain. Great advertising for the big company, and a nice bonus for investors in the business being funded. Win:Win.
Drake: What are the three things you would advise an issuer on crowdfunding for equity to be cognizant of?
PURCELL 1. Patience – this will be legal eventually, but it isn’t yet. 2. Running a business is hard work, and raising capital will require some heads down and even uncomfortable things; but you’ll just need to buckle down and get it done. 3. More Patience.
Drake: What are the two biggest challenges for the industry?
PURCELL 1. Regulators are still crafting rules, even as the industry is starting to issue Best Practices and entrepreneurs are writing code for platforms and third-party services. That these are happening in parallel means we will have to be incredibly flexible and fast moving to make changes and adapt to rules when they are finally issued. 2. Bad actors, either maliciously or stupidly, pop up offering crowdfunding before it’s legal. This could result in a media or regulatory backlash.
Drake: What are two things obstructing the ability of crowdfunding for equity to run efficiently?
PURCELL First, all industry participants will need smart people who understand both the regulatory and technology sides of the business. Without this, the business is a non-starter. Second, capital. Currently the players are all being angel funded, which is understandable given the regulatory risks. However to really take off we are going to need some venture capitalists or large strategic partners to step up and provide significant funding.
Drake: Scott, what are the biggest opportunities for your firm positioning yourself as a leader and where do you see most of your business emanating?
PURCELL The market for 506-D is already, even without this legislation, $1 trillion. Add in the changes for 506(c)-D and Crowdfunding and we will ultimately have a multi-trillion dollar market. As an early mover and industry leader we will get enough market share to be incredibly successful, both as our own business and in helping get businesses funded all over the country.
Drake: How big do you see this industry be in dollar amounts in 2014?
PURCELL $2 trillion for 506-D and Crowdfunding. That’s a lot of jobs being created.
Drake: How will broker dealers and angels be affected by this law and how can they best leverage it?
PURCELL BD’s can syndicate with platforms to participate in offerings, and the largest ones will likely ultimately own the platforms. For brokers (employees of BD’s), this provides another commissionable product they can help clients with. For angels, it creates unprecedented deal flow and gives them amazing flexibility in co-investing and creating groups. Everyone wins.
Drake: Scott, this is a tremendous insight to what is happening in the industry and we wish you a continued success in the space. We are expecting to see a lot of developments in 2013. The Gold Rush at Forbes Magazine outlines some of our predictions in crowd funding 2013 and the time frame we are expecting is still on track as outlined in Obama’s 10 Steps with SEC & FINRA to Legalize US Equity Crowd Funding. We hope to have your input on what 2013 brings and we encourage you to continue following our work and developments in financial innovation.