The Jumpstart Our Business Startups Act (JOBS Act) was signed in law over three years ago and in that time, it’s had a notable impact on the startup economy. The IPO “on-ramp” has made it easier for private companies to go public, general solicitation has allowed startups to openly solicit investment from high net-worth investors, and the new Reg A+ has revamped another channel for capital formation for expanding companies. But the JOBS Act’s most exciting and promising achievement—investment crowdfunding open to all Americans—has languished at the SEC, held up in the commission’s rulemaking process. This delay has been frustrating to the entrepreneurs, new crowdfunding platforms, and to everyday investors ready to participate in this exciting new market. We even echoed those frustrations ourselves earlier in fall when we gathered over 200 signatures urging the SEC to act. However, since then, we’ve also gathered additional intel on how similar forms of crowdfunding have flourished, and the regulatory frameworks that have facilitated their successes. Evidence from these ancillary markets suggest the proposed policy framework would benefit from a modified approach.
Our latest white paper, “Financing the New Innovation Economy: Making Investment Crowdfunding Work Better for Startups and Investors,” addresses these concerns. In the paper, we analyze activity from similar crowdfunding markets including rewards and donation-based crowdfunding; accredited investor crowdfunding under Title II of the JOBS Act; as well as investment crowdfunding in the United Kingdom, where everyday investors have been able to invest in emerging companies in exchange for equity since 2012. These crowdfunding markets have experienced exponential growth in the past few years, offering important lessons for regulators as we move closer to launching investment crowdfunding for retail investors in the U.S. One of the most salient takeaways is that fraud has been virtually non-existent, even though issuers are subject to few, if any, of the disclosure requirements that typically accompany public capital raises. Conversely, the current policy framework for investment crowdfunding under Title III includes substantial, onerous disclosure requirements that we believe could be detrimental to the long term growth and sustainability of investment crowdfunding.
Identifying lessons for policymakers from similar crowdfunding regimes, we propose several improvements to the current Title III regulatory framework. These changes will help ensure that investment crowdfunding for non-accredited investors is a successful, sustainable, and efficient market and most importantly, that it attracts quality companies without debilitating costs.
Enabling investment crowdfunding for all investors is critical for expanding capital access to emerging entrepreneurs and startups across the country. Raising capital is often the greatest challenge an entrepreneur faces when getting his or her business off the ground, and too many potential business leaders are left behind because they lack adequate personal finances or can’t tap into sources of angel financing or venture capital. Because investment crowdfunding will allow millions of new people to easily provide capital to startups, it has the unique potential to drive much-needed capital to underrepresented groups of entrepreneurs.
It’s with these entrepreneurs in mind that we believe more work remains to be done to perfect the investment crowdfunding regime. With the Securities and Exchange Commission rumored to finalize rules for Title III by the end of the year, we hope this paper spurs a productive dialogue with policymakers about how to continue improving upon the statute and the forthcoming rules, especially as we garner new insights from the impending U.S. crowdfunding market.