Earlier this year, the Republicans and Democrats joined in a historic bi-partisan effort to reshape how young companies are funded, and how shares in these companies are made available to the public. They moved quickly and decisively, and to the surprise of many, agreed on this important issue.
The JOBS Act (passed by Congress, and signed into law by President Obama on April 5th) will let companies use internet-based crowdfunding to raise capital. This means that startups and growing businesses can more readily tap into investor interest and offer shares to large groups, aka “The Crowd”, for some form of economic return, e.g. equity. No longer will investing be limited to big banks or an exclusive club of accredited investors. The SEC is in the process of finalizing key regulatory elements of the JOBS Act, a process that will take the better part of the rest of this year.
Hopefully, the important work that the SEC is doing in this area will continue to protect the interests of investors while maintaining key aspects of the law, so that everyone can reap the benefits. As long as there are not excessive modifications to the regulations, the new law will do what the legislators intended: create jobs and stimulate investment in business. These are some of the key issues and some suggestions on how the SEC can best resolve them:
- Since there could be potential conflicts of interest with portals and the companies that use them, the SEC might take an overly restrictive stance on what advice portals can and cannot provide. The SEC should allow sufficient leeway to be judicious in determining if a potential conflict exists, while still permitting sites to provide feedback and advice on an ongoing basis.
- Crowdfunding can work seamlessly with traditional sources of funding (VCs and angels), and the SEC can provide specific guidelines as to how these funding sources can/will interact. The crowdfunding round should be treated like any other stage of capital and freely interact with later stages of funding.
- As the SEC finalizes details on reporting requirements, it’s going to be important to be transparent, but it’s even more important that companies are focused on developing their businesses and ideas as opposed to having to spend most of their time and money on reporting requirements.
Crowdfunding is going to be an amazing method for businesses to grow and change the world. In order for such companies to reach their full potential, all the pieces will need to fall in place, and everyone will need to cooperate to build a successful and sustainable crowdfunded startup industry.
The industry can be expected to see a lot of boom and learning in the next six to 12 months. While proper reporting and safeguards are an important part of that process, it needs to be done in a way that does not tie up the companies in so many regulations that they cannot reasonably proceed.
Your vote counts on this issue, as does your opinion. You can share your thoughts on these important issues with the SEC here.
By Sang Lee