Noah J Nelson on Thursday, Oct. 29th
The Security and Exchange Commission is due to finalize the rules in Title III of the JOBS Act this Friday, a long awaited event that will change the dynamics of equity crowdfunding.
How exactly it will change them is a cause for both hope and consternation amongst crowdfunding observers. The equity rules could shift the way that the bulk of tech and business related crowdfunding projects are structured, and open up whole new avenues for small dollar investors to get involved in a start-up scene that has until now legally been barred to them.
(What it will do to creative crowdfunding is a whole other argument we won’t breach at the moment.)
One of the companies that has been advocating the SEC on how to structure the rules is SeedInvest. We talked with its CEO Ryan Feit, about what he’s looking for—and hoping to avoid—in this week’s announcement.
Turnstyle: What’s your biggest hope for the JOBS Act Title III rules?
Ryan Feit: The best case would be the SEC addressing three key points when they issue the final rules:
1) The SEC should reduce or remove onerous and expensive ongoing reporting requirements for companies. The currently proposed rules require companies to continue to obtain audited or accountant-reviewed financial statements each year post-fundraise. Although this is appropriate for public companies, most startups can’t afford audited financials and it’s frankly unnecessary during the first few years. Hopefully the SEC has thought long and hard about this issue because its ultimately the investors’ cash that will go towards these costs and it could be put to much better use.
2) The SEC should permit companies to Test the Waters ahead of launching a fundraising campaign. Under the proposed rules companies would need to incur meaningful upfront costs ahead of launching a fundraising campaign which may or may not be successful. In a previous SEC comment letter, SeedInvest suggested that the SEC permit companies to enable investors to express interest upfront (“Testing the Waters”) so they have more visibility into likelihood of success before incurring significant costs.
3) The SEC should scale back potential portal and issuer liability. According to the statute, an issuer has the burden of proof of demonstrating that their statements in the offering documents are not materially misleading. In addition, platforms themselves are considered issuers for the purposes of liability. So if a company accidentally doesn’t include a small piece of information, both they and the company and the platform could be liable if things go south a few years later.
TS: What would be the worst case scenario here?
RF: The final rules will be far from perfect but should be enough to get started. The rules will need to evolve over time once there is actual real data on equity Crowdfunding and that is fine. The worst case scenario (which is highly unlikely) would be if the SEC votes against Title III. Again, I don’t think this is a legitimate possibility this late in the game but that would definitely be a terrible outcome.
Feit will be attending the actual announcement, and we hope to check back in with him after the rules are set forth.
Small efforts can have big impacts, that’s the principle of crowdfunding in a nutshell, and opening up the doors of the venture capital world is an enticing risk-reward scenario. Just how these SEC rules are structured will determine who can get involved–and reap the biggest rewards–from equity crowdfunding.