There have been some interesting developments from the American Jobs Act. One of the most recent developments is in equity crowdfunding.
Crowdfunding, as most of you know, has been around for some time… at least since the late nineties. It is dominated by donation or awards platforms. There are also platforms geared to start ups. Kickstarter is one. However, what the SEC’s proposed regulations seek to tackle are true equity crowdfunding platforms. These are platforms that attract real investors expecting a return on their investment.
This is uncharted territory for the SEC and the 585 pages of proposed regulations that were developed by a bipartisan commission and handed over to the SEC on October 23rd, 2013, will be subject to a 90-day comment period at the conclusion of which some action should take place. While this implementation could be as early as May, it is much more likely that it will be early fall of this year before everything is in place for equity crowdfunding.
What Is the Impact on Venture Capital?
At first blush, it could be thought of as something of threat. After all, the wealth of the crowd dwarfs that of venture capital. The reality, however, is that given the limitations imposed under the JOBS Act, it is likely to become venture capitalists’ best friend.
Individuals face strict limits on the amount they can invest and the companies themselves are not permitted to raise more than $1 million annually via crowdfunding. This may get a viable enterprise off the ground; off the ground high enough to become a blip on the venture capitalists’ radar screens. This would actually represent significant risk mitigation for venture capital as the initial seed money, arguably the most risk-prone round of funding, would be endured by multiple small investors in an equity crowdfunding scenario.
Venture capital would then be in a position to select from a variety of start ups that have a proven track record. As larger injections of capital are needed, these successful companies can turn to a bevy of eager venture capitalists. It seems to be a win-win for entrepreneurs, start ups and venture capitalists alike.
Here’s the Problem
The JOBS Act called for the SEC to issue equity crowdfunding rules within 9 months. Yet it was more than 18 months before the draft rules were released. Given the lack of consequences for the delays thus far, it is entirely probable that the debate will continue beyond the target date. This is an unfortunate circumstance for the job-starved economy and the revenue-starved government. Hopefully the SEC, seeing the very great impact these regulations may have on economic growth, unemployment and revenue shortfalls, will act swiftly with regard to implementing these rules.
Equity crowdfunding has great potential and could unleash millions in start up investment when the economy needs it most. Venture capital should support this innovative investment vehicle; entrepreneurs and start ups will certainly support it and there are many enthusiastic mom and pop investors waiting expectantly for the SEC to act.
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