The SEC released a 585-page crowdfunding proposal Wednesday. It contains 295 questions that SEC wanted public commenting.
Aside from the fundamental issues, i.e. you can only invest 10% of your annual income or 5% or $2000 of that pending whichever is higher when you earn less than $100,000 per year, you can only raise $1 million per year, here are some of the interesting questions and challenges:
1. Should foreign platforms be allowed to operate in the US?
I would suggest they should, as long as they partner with a US platform or broker-dealer. This is a good direction that we see.
There is a framework to allow commissions to be paid out to groups that are promoting the deals. We are closely monitoring how this would play out as this is extremely important for social media marketing and reach.
The law does not allow investors to be pooled into a single purpose vehicle that acts like a fund and counts as one single investor. The 2000 person rule that was implemented under the JOBS Act in 2012 does not apply to crowdfund equity companies. However, how this will translate for other offerings that run simultaneously and subsequently in the life of a company will have to be addressed. We have discussed a drag - along clause triggering the sale of shareholders, if the majority owner is selling his shares. It is a strategy common in the VC and angel communities - that have long been exercised.
2. Audited financial requirements may push companies to raise less than $500,000 to avoid its cost. In addition, audited financials for a startup with no revenue or operational history makes little sense. The JOBS Act is written so our commenting will allow us to change the $500,000-$1 million requirement having audited financials and make the limit higher - maybe $750,000.
Leading platforms like SeedInvest and CircleUp will be able to streamline most of these things, to include the paperwork required in the proposal. Offering materials and financials with updates on offering status at 50% must be filed properly together with any changes to offerings and financial annual statements. The punishment suggested is a ban from crowdfunding for 2 years if an annual filing is not submitted. These are good rules that train entrepreneurs on governance, transparency and shareholder responsibilities.
3. There is still the question of liabilities of issuers and platforms and recourse available.
We do know 90% or more startups fail so this system needs transparency at the failure level, but also set expectations to investors that companies fail all day long.
The rules will extend the expected norm for 120 days and summarization the SEC has to do with all the answers but we are entering new financial territory - we are allowing securities to be marketed to unaccredited investors. Very exciting but also worrisome. Commissioner Stein did see the Regulation D, 504 as a failure as it had to be revised years later due to a high degree of fraud under this rule. Yet, the proposal is there. Chairman White has delivered, and now we are feverishly working towards addressing all the concerns to have a new capital formation in place.
Join me here in these events in NY to discuss other breaking issues, learn about what advice or marketing crowdfunders can do and see what your industry can do with it: Entertainment Financing November 5 with Former Vice Chair of NASDAQ David Weild https://thesoholoft-
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft, a global event-driven financial media company helping firms and funds advertise for investors. You can also reach him directly at David@LDJCapital.com
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