On July 10th, 2013 new changes to regulations regarding the general solicitation of securities was announced by the Securities and Exchange Commission as the enactment of the Title II regulations of the JOBS Act moved forward.
The JOBS Act, enacted last year, finally looks to remove one of the largest regulatory barriers that companies have faced in the capital markets since the 1930s: the ability to solicit capital directly from the public, otherwise known as general solicitation.
“As we fulfill our mission to facilitate capital formation and maintain fair and efficient markets, the Commission must always focus on strong investor protections,” said SEC Chief Executive Mary Jo White.
“We want this new market and the private markets in general to thrive in a safe and efficient manner, and these rules we adopt and propose are designed to facilitate that objective”.
With companies now able to solicit directly from the public, concerns about both investor protections and the ability of compliance structures to effectively govern investment markets remain unanswered. The SEC looks to develop additional regulations and structures along the way but any effective implementation program would be dependent on how compliance regulations are enacted and how regulatory bodies and companies share information such as disclosures and material information.
How Does Effective Compliance Help Companies, Investors and Regulators?
A survey conducted by Iron Mountain has found that highly regulated industries such as financial services and banking achieved the highest overall scores in numerous best practices and compliance management. These strong performances can be attested to the numerous regulations those industries must follow. In addition, the effective use of technology has emerged to help bridge the gap between effective regulatory compliance for these new provisions and the responsiveness of regulators and companies to establish standards and regulations.
In the case of general solicitation, another example includes filing of advertising material and information that is to be used for solicitation of securities with the SEC and in some cases with state regulators.
With accountability and confidence becoming ever more important with the lifting of the ban on general solicitation, entities that before had to solicit capital more or less by word of mouth and other forms of private communication can now broaden their reach.
Another standard is that fundraisers must adhere to is the filing of a Form D with the SEC at least 15 days before any general solicitation of securities and must amend that Form D within 30 days of the completion of the fundraising round. As a result, many expect the growth of new cottage industries that revolve around crowdfunding, such as third party administration services or investor matching-making sites, also known as portals that may find themselves either allied with registered broker-dealers or will have to register themselves with the SEC.
How Sound Market Structures Will Lead to Strong Economic Growth
According to an estimate from leading crowdfunding platform WeFunder only 3% or 256,000 of the 8 million accredited investors in the US can be truly described as “angel” investors. Those angels represent a significant investor base; the angels invest some $21 billion each year. General Solicitation will enable entrepreneurs to broadcast investment opportunities to not only 8 million accredited investors but numerous non-accredited investors as well.
With provisions such as Title II in place, this sets the stage for crowdfunding to become part of the investment banking landscape. However some experts voice concern that much has been said about what is being done, even less about how to educate companies and the public about how general solicitation for crowdfunding works.
Kiva co-founder, Jessica Jackley, who also founded the now-defunct crowdfunding portal, Profounder, says “I’m less concerned about abuse and more concerned about how well the new crowdfunding platforms will educate new investors and entrepreneurs on their investments,” she said in a TechCrunch article about the implementation of Title II.
Howard Leonhardt of Leonhardt Ventures and the official spokesperson for California for the JOBS ACT and Crowdfunding Startup California saw the implementation of Title II provisions as essential to the capital markets landscape. “The limit to only 35 non-accredited investors in 506D private placements which usually only bring in $1000 each or $35,000 total with a $20,000 legal bill is not effective in financing the seed stage of new potentially life-saving inventions.” according to Leonhardt.
“VCs, super angels and angel groups have all migrated to later stage investments, often demanding companies already have substantial revenues before they will invest. As the recession has deepened early stage healthcare innovation, companies are now chasing a shrinking pie of angel investors and VCs.”
Ultimately the lifting of the general solicitation ban should be interpreted as setting the stage for Title III of the JOBS Act: Crowdfunding, which means that the JOBS Act provisions in its final form may be possibly implemented as soon as early next year.