More than 18 months since The Jumpstart Our Business Startups Act (or JOBS Act) was signed into law in the US, the Securities and Exchange Commission (SEC) yesterday presented, and unanimously voted to approve, a proposal to enable small businesses to raise equity capital from crowdfunding. Although the concept of crowdfunding – enabling many individuals to contribute (generally fairly small) amounts to fund a project in return for future reward – isn’t a new idea, financial services regulations have historically restricted capital providers to high net worth individuals or sophisticated institutional investors.
The new proposal of the SEC, approved in an open meeting webcast on Wednesday morning, will open up the pool of potential contributors to, essentially, anyone with an internet connection.
At the time of signing the JOBS Act, President Barack Obama was predictably bullish, stating: “The last few years have been pretty tough on entrepreneurs. Because of this bill, startups and small businesses will now have access to a big, new pool of potential investors – namely the American people.”
Although other parts of the JOBS Act (such as enabling online advertisements to accredited investors or relaxing reporting requirements) were addressed by the SEC relatively quickly, the final crowdfunding element has been delayed for over a year. Today’s announcement launches a public comment period which will require a further SEC vote to carry into effect.
Under the new proposals, companies can look to raise up to $1 million per year by issuing shares via “funding portals” (intermediaries between the companies and the investor which are responsible for ensuring the investors meet the participation criteria). The SEC hopes to limit the exposure of investors outside the high-income bracket by capping the amount that individuals can invest. Participants with an annual income or net worth of less than $100,000 will be allowed to invest only $2,000 or 5% of their income or net worth (whichever is the greater). The current proposals do not require the company seeking funding to verify income levels, but the SEC has actively sought views on this as part of the comment period.
The level of oversight from the company issuing shares will depend upon the amount of money it is looking to raise: if funding of less than $100,000 is sought, then the regime is fairly relaxed and company officers need only submit a financial statement. Greater amounts require accountant sign-off and for a funding round greater than $500,000 the company must produce an auditor’s statement.
UK crowdfunding portals wanting to manage US crowdfunding investments would need to submit to an examination process through the SEC before being able to register. The current UK financial promotion regime effectively stymies open crowdfunding by the public, as it purposefully requires communications to potential investors to be approved by someone authorised by the Financial Conduct Authority. Whilst there are some exceptions to this prohibition (such as making communications solely to investment professionals or high-net worth individuals), a general offer to anyone to invest would not be one of them.
The UK Government has, to date, favoured tax efficient investment schemes such as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) over a relaxation of the regulatory hurdles which prevent crowdfunding. It will be interesting to see, once the new SEC proposal takes effect, whether this will change.
About the author
Andy Moseby is corporate partner at Kemp Little LLP, leading technology and digital media law firm. Andy is also a member of the BIMA Executive and can be contacted on Andy.Moseby@kemplittle.com.