Friday, January 17, 2014

Crowdfunding Takes One Small Step

In early 2012, Congress passed the JOBS Act largely as it was proposed by President Obama.  Politicians love acronyms.  This one stands for Jump Start Your Business.  The provision of the act aimed at making it easier for private companies to raise capital has not lived up to the title.  

The JOBS Act called for the SEC to set up regulations and procedures for private companies to raise up to $1 million per year through so-called crowdfunding.  It is a new phenomenon relying on Internet-based social networking technologies to cast a wide net for investors, who pledge their support on-line.  Rules were to be completed by the end of 2012.

It took until October 2013, to get around to publishing a set of proposal rules for public comment.  That public comment period ends the first week in February 2014.  The SEC staff could decide to extend the comment period or move on to a final set of rules. 

There has been quite a bit of wrangling already vis-à-vis the crowdfunding opportunity.  Not surprisingly, there are some who might like to see crowdfunding go away entirely.  If small, early stage companies with good prospects can raise capital on their own, venture capital might lose out on some excellent investment opportunities. 

Others have noted that proposed disclosure requirements for crowdfunding will be stricter than under Rule 506 of Regulation D that has been allowing private companies to raise funds from up to 35 non-accredited individuals.  The added disclosure effort will come with a cost for lawyers and accountants to prepare materials and file them with the SEC.  The idea is that the web-based crowdfunding platforms will be effective enough to make the added cost worthwhile.

Finalization of the crowdfunding regulations could not come too soon.  With continued improvement in the U.S. employment situation, decision makers are likely to feel more confident in the future and want to execute on new business plans.  A new means to raise capital would be timely.  The SEC may not be jumping, but at least it has taken one small step toward getting crowdfunding established.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


1 comment:


This seems like a wise idea on the surface. But theirs a real problem for abuse. Private companies can can have several owners if they want or even a dozen. At least that way you have a idea what the quality of the owners is like. Investing in local companies its not something that you would think of doing.