Crowdfunding Rules: Four Years Late and Millions Short
Today, Monday, May 16, more than four years and one month after Congress passed and President Obama signed the Jumpstart Our Business Startups (JOBS) Act of 2012, the law’s Title III provisions for investment-based crowdfunding finally go into effect.
While this implementation by the Securities and Exchange Commission is better late than never, the crowdfunding rules are not only years too late, but millions of dollars short. European and Asian countries have now far surpassed the U.S. in reducing their red tape to allow startup entrepreneurs to raise funds from ordinary investors, and giving both the opportunity to grow wealthy with a firm’s success.
The limit of $1 million for a crowdfunding raise, given that legal and auditing costs under the rule may be in the hundreds of thousands, is likely too low to provide many investors and entrepreneurs the opportunity to achieve a solid return. In Great Britain, by contrast, firms can for much larger amounts.. Under the much broader UK crowdfunding rules, Camden Town Brewery did an equity raise equivalent to $3 million. Earlier this year, Camden Town was acquired by the giant brewer InBev Anheuser Busch, giving investors who participated in the crowdfunding raise an 88 percent return.
Unfortunately, under the Title III provisions as they are, middle-class investors will likely not get this opportunity in the US. But the good news is they could get one soon if Congress and the president can once again work together and pass the Fix Crowdfunding Act (HR 4855), sponsored by original JOBS Act architect Rep. Patrick McHenry (R-N.C.).
This bill would raise the crowdfunding limit under Title III from $1 million to $5 million. It would also allow crowdfunding firms to engage in more marketing and advertising, something severely restricted under the provisions going into effect.
Many other provisions of the JOBS Act, despite being a limited respite from the ever-growing onslaught of the regulatory state, have proven workable. These include the Title II provisions that make it easier for entrepreneurs to market and advertise for wealthy “accredited investors,” and the Title IV “Regulation A+” rules that allow equity raises from all investors of $50 million or less to have some exemptions from the onerous Sarbanes-Oxley and Dodd-Frank regs.
Perhaps some clever entrepreneurs can make the crowdfunding rules work for them when they go into effect. But why not fix them now with the Fix Crowdfunding Act before another four unproductive years go by?