Return on Change is elated by the SEC’s recent approval of proposed crowdinvesting regulations under Title III of the JOBS Act. Crowdinvesting will be a game changer for startups raising capital in the private securities market, opening up a potentially huge source of financing and allowing everyday investors to have a say in what companies get funded and proliferate. It’s a wonder the marketplace for raising capital has taken this long to evolve, especially in light of recent advances in technology and the way other industries have leveraged the internet to improve efficiency.
However, like all disruptive innovations, crowdinvesting also has its fair share of criticisms. The scrutiny it faces is amplified by the fact that it operates within a field that has been historically heavily regulated. And with the recent publication of proposed regulations, many advocates have become disillusioned with some of the requirements that issuers will need to observe. For one, we recognize that audited financials and ongoing reporting requirements may not be the most attractive aspects of the proposal. But if there’s value in any new practice, the industry will create solutions.
Myth: The associated costs and complexity of compliance will severely inhibit crowdinvesting’s viability as an alternative funding source.
Reality: Among the most widely criticized proposals is the burden placed on issuers (aka startups) to provide disclosures for amendments, progress updates, and ongoing annual reports to the SEC and investors. The cost and time that would need to be spent complying with these requirements have left many wondering whether entrepreneurs will even go through the trouble of relying on the crowdinvesting exemption. However, if the past is any indication of what’s to be expected in the future, we only need to redirect our attention to the recent lifting of the ban on general solicitation. Many of us may recall the slew of solutions that cropped up for some of the SEC’s more cumbersome general solicitation proposals. For those who do not know, the SEC proposed requiring issuers to include prominent cautionary language on all written general solicitation materials. This meant startups were expected to add standard legal disclaimers to their tweets (in 140 characters or less) whenever they sought to advertise a raise – a seemingly impossible requirement to follow. Eventually, some very clever folks discovered social media legal disclosure programs to circumvent Twitter’s character limit and facilitate compliance with the proposed rule. A market problem was posed, and appropriate solutions were discovered.
Who’s to say similar solutions won’t be introduced for crowdinvesting? Third party due diligence providers already operate within the online Rule 506 industry, offering ways for entrepreneurs to comply with statutory obligations without getting financially drained or distracted from everyday business operations. These providers will likely move into the realm of crowdinvesting and offer similar services for crowdinvesting raises.
As for audited financials, crowdinvesting will introduce startups to professional accounting much earlier in their life cycles than what is now considered the norm, causing an increased demand for lower auditing costs and faster review processes. In turn, this new market focus will prompt CPAs to develop skills and methodologies to meet these demands. Just as crowdinvesting is an improvement on capital-raising made possible through technology, professional accounting services can benefit from digitizing the process.
All in all, much can be done to improve some of the pain points that entrepreneurs may undergo when relying on the crowinvesting exemption. The market doesn’t even exist yet and it will take time for the industry to evolve. The reality is that many startups simply aren’t attractive or mature enough to rely on traditional Rule 506 or 506(c) offerings (these are the Title II, general solicitation rulings). Bank loans are very difficult to come by and most, if not all, VCs don’t even consider startups that are raising seed or early-stage money. Crowdinvesting will be beneficial to entrepreneurs and the value it provides will give rise to innovative solutions for the obstacles it may face during its infancy. Ancillary players will enter the industry to answer these difficulties and the crowdinvesting intermediaries themselves will also play a large part in optimizing the process.
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