At the 2016 Angel Capital Association Summit (ACA) in Philadelphia on May 9 through 12, 2016, angel investors and entrepreneurs gained insight about details and implications of the new regulations for the JOBS Act relating to crowdfunding, which will go into effect on May 16, 2016.
Sebastian Gomez Abero, Chief of the Office of Small Business Policy at the SEC, who was a contributing author to the crowdfunding portion of the JOBS act, and active angel investor Christopher Mirabile from Launchpad Venture Group addressed the summit’s 700 plus attendees, comprised of ACA members and entrepreneurs participating in the Innovation Expo portion of the summit.
Investors, entrepreneurs and attorneys share in the anticipation of the regulation change. Going forward unaccredited investors will be allowed to invest in startups and early stage companies that previously was restricted to accredited investors via strict SEC guidelines. Accreditation is defined as those individuals with incomes over $200K (or with spouses, incomes over $300K) or a net worth of about $1 million.
Individuals who do not meet the accreditation requirements (thus unaccredited) will now be allowed to invest limited amounts based on formulas associated with their income and other criteria. The regulation also recognizes and oversees the online platforms that will connect investors to entrepreneurs. The platforms must meet SEC regulations in how these new connections will be made and handled between parties.
Elizabeth Sigety, attorney at the law firm FoxRothschild and a moderator on one of the summit’s panels, noted the anticipation that is surfacing, “Crowdfunding is clearly a developing area where the startup community will learn through experience as time goes by.” Sigety suggested companies initiate a strategy discussion with its finance and legal team about future direction and funding needs, in particular, to determine if crowdfunding is a good alternative. “It is not one size fits all,” she said.
Contributing author to the regulation Gomez Abero emphasized five key aspects of the new crowdfunding regulation about which investors and companies should take time to gain familiarity. His overview touched on:
Where crowdfunding takes place
Abero stressed that there are new regulations on the intermediary through which crowdfunding can take place: “This intermediary must be a registered broker or dealer, or a new type of entity that was created as a result of this rulemaking called a ‘funding portal.’” Abero then elaborated on ‘funding portals’ and stated they are intermediaries similar to brokers or dealers, but with much more stringent restrictions on the activity which they can engage in.
The SEC official also cited that there are new limitations of investments through crowdfunding. “An issuer (company) will be limited to raising no more than $1 million over a 12-month period,” he said. In regards to investors, he explained that investor limits are based upon investor net worth. However, there is a cap for investors of any net worth at $100,000 over a 12-month period.
Abero explained key mandates of the new regulations to all issuers that provide an offering document to the SEC, and that this offering document must be abided by and contain a description of the issuer’s fiscal condition and fundraising goals.
The new crowdfunding rules will also require all issuers to complete an ongoing annual report until there are no more shares outstanding from the company’s crowdfunding, or if the company files for bankruptcy or liquidates.
Crowdfunding and registering securities
Abero assured attendees that under these new regulations, all shares sold pursuant to crowdfunding will not count towards the limit which requires companies to register securities under the Exchange, so long as the company’s issue is current and has a transfer agent, and the company’s assets do not exceed $25 million.
Mirabile, an angel investor from Launchpad Venture Group, followed Abero’s presentation with remarks about the potential impact that crowdfunding might have on angel investing. He acknowledged that there are potential benefits to those using these online crowdfunding platforms. He also addressed three key areas and concerns:
More guardrails are good, but they cause other problems
Mirabile first tackled how the new crowdfunding regulations would put in place guardrails for investors and companies alike. While Mirabile initially praised these guardrails, he delved into the problems which may come with them.
“This approach is a lot more work and expense for the companies,” Mirabile said. “More disclosure, more preparation, more paperwork, more investors, more intermediaries and more long-term implications and responsibilities.”
However, Mirabile assured attendees that he was in no way criticizing the logic behind the new regulations, but simply bringing forth key issues that may need to be addressed.
The sophistication of these rules may deter investors and companies
As much as accredited crowdfunding has flourished over the past few years, Mirabile suggested that the new class of funding has the potential to drive companies and investors away. The investor begged the question, “Will the best companies, with the sharpest teams and most potential—in terms of their market potential—who have a choice for how they raise their money, are they going to choose this crowdfunding approach?”
Mirabile then presented a similar question about investors. “Will they be drawn to whatever deals end up on these platforms? We simply don’t know yet.” Once again, Mirabile emphasized that he was not suggesting regulation crowdfunding will result in companies and investors seeking out alternative platforms, but rather, just proffering what should be considered.
Encouraging innovation at the entity level
However, Mirabile praised the new regulations for startups where small teams and communities can come together and create a joint enterprise. “These equity deals allow the new stakeholders to come together as long-term equity holders in a joint enterprise of significance for the stakeholders,” he explained.
The conference panel shed light on key areas that investors and entrepreneurs should consider as they navigate down this new funding path. For investors and entrepreneurs alike, much remains to be seen over the coming months.
Those seeking more information about crowdfunding may review Title III of the JOBS Act, which addresses this in more detail.