2015 Year in Review: Capital Access

This post is one in a series of reports on significant issues for startups in 2015. In the past year, the startup community’s voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world’s policy goals in 2015, such as immigration and patent reform, remain unfulfilled. Check back for more year-end updates and continue to watch this space in 2016 as we follow policy issues affecting the startup community.

by Anna Duning and Evan Engstrom

2015 will be remembered as the year of investment crowdfunding. In October, the SEC released the long-awaited rules that finally allow everyday investors to crowdfund startups in exchange for an ownership stake in the business. The Title III rules were certainly the most anticipated development in of the year in capital access policy, but the SEC also unveiled other alternative fundraising mechanisms that may end up eclipsing investment crowdfunding in impact, at least in the short term. Congress joined the mix as well, working on a variety of bills to help promote capital formation. However, as with the SEC’s efforts, the efficacy of these programs remains to be seen. Ultimately, 2015 was a year of new developments and renewed optimism for capital access policy.

Investment Crowdfunding is Finally Here

After Congress passed the JOBS Act in 2012, the SEC was tasked with crafting rules to fill in the details of Congress’s proposals, including Title III of the JOBS Act, which legalized investment crowdfunding for non-accredited investors. In the intervening years, the SEC passed rules supporting other aspects of the JOBS Act, but it dragged its heels in implementing investment crowdfunding under Title III. Having missed several prior deadlines, the SEC finally issued rules for non-accredited investment crowdfunding at the end of October. The rules themselves improved upon the SEC’s original proposal from 2013 in some key ways, but, as we discussed at length in a white paper on the then-proposed crowdfunding rules earlier this year, the upfront disclosure obligations are especially problematic. Unless and until startups can raise small amounts of capital without having to incur significant costs preparing disclosures, that are largely useless to investors, it’s unlikely that many startups will turn to investment crowdfunding as a primary fundraising tool. We’ll be watching.

The Mini IPO

Several months before the SEC released the long-awaited final Title III crowdfunding rules, the agency completed another set of JOBS Act rulemaking, which garnered slightly less attention. With Title IV rulemaking complete, growing private companies now have another funding mechanism, Regulation A+, through which they can raise up to $50 million without being subject to some of the onerous reporting requirements required of publicly traded companies. Industry experts have called it a sort of “mini IPO.” Regulation A+ also allows for a limited subset of non-accredited investors to participate in the investment. In its short lifespan, this new exemption has seen limited activity: as of October, only 34 companies had pursued or were in the process of pursuing a Reg A+ raise. This slow start may be attributable challenges from state securities regulators about exactly whom should be eligible to take part in these new investments.


States Take Up Crowdfunding, Too

While investment crowdfunding rules languished in the rulemaking process until the very end of 2015, states took it upon themselves to craft new capital formation tools for startups. Throughout the year, several states passed crowdfunding legislation, authorizing local businesses to raise equity from local shareholders within the state. New Jersey was the most recent state to legalize intrastate crowdfunding in November. The SEC also gave intrastate crowdfunding a boost of confidence in November when it proposed a new rule that, among other improvements, would allow companies to pursue intrastate crowdfunding even if incorporated elsewhere. Ultimately, intrastate crowdfunding may not be an appealing fundraising option for high growth technology startups whose services and products may reach far beyond a state’s borders, yet we’re pleased to see state legislators recognize the importance of capital formation for new firms.

Congressional Support for Startups

Throughout the year, members of Congress also attempted to bolster capital formation through various measures, though on a scale far more modest than 2012’s JOBS Act. Recognizing that startups and other tech companies are staying private for longer, policymakers have sought ways to provide much needed liquidity for employees. One such bill, the RAISE Act—which was passed unanimously in the House and ultimately included in the massive highways bill—streamlined the process of privately selling unlisted shares. Other capital access-related legislation such as a bill that would create exchanges for private venture securities (the “Main Street Growth Act”), and one that would loosen restrictions on startups “generally soliciting” investments (the “Helping Angels Lead our Startups” or “HALOS” Act”) received some air time in Congress, but remain in legislative limbo.

Looking Ahead to 2016

In 2016, it seems likely that policymakers will direct efforts in capital access policy towards a few key areas. Improving the structure of Title III investment crowdfunding should remain a priority, as many critics have identified issues with the rules. If Congress is serious about democratizing startup financing, they’ll need to diligently track the growth of the crowdfunding sector and promptly respond to problems that spring up along the way. Similarly, despite the passage of the RAISE Act, liquidity for private shares remains a concern as IPOs decrease. While many tech companies don’t like the idea of liquid markets for their shares, if startup employees continue to find it difficult to receive value for their stock options, startups will find it harder and harder to attract top talent, as employees will be loathe to leave larger firms if the compensation startups can offer is functionally useless.

Finally, as 2016 is likely to see a large scale debate on tax reform, Congress will inevitably consider tax policies meant to help drive startup activity. 2016 may not match 2015’s monumental capital access policy achievements, but startups should work to harness Congress’s enthusiasm for policies that promote startup growth to continue the positive momentum in the new year.