2016 Crowdfunding Regulation Review

Crowdfunding Small Business Crowdfunding legislation is undergoing significant changes with more adjustments forthcoming in the future. The Regulation Crowdfunding Act captivated the investment world in May 2016, and has since ignited a new industry. The financial world had mixed reactions to the legislation as its various provisions took effect, and even though the laws are comparatively new, officials are already calling for reform along with other crowdfunding investment proponents.


Crowdfunding Reform Begins

As of May 16, 2016 – crowdfunding opened up a new investor class. The Jumpstart Our Business Startups (JOBS) Act, also called Regulation Crowdfunding and Reg CF, made this momentous occasion possible. Legislators hope that it will incite business growth in the United States. Due to the new law, firms now have access to more than 300 million new investors and vice versa.

2016 Crowdfunding Changes

The JOBS Act defines new rules for pooled investment participants. Among other things, the legislation makes it legal to solicit investors on the Internet and allows non-accredited investors to enter the market with limitations as to how much firms can legally sell to those individuals.

Under the legislation, companies can only secure one million dollars total from non-accredited investors during a sliding 12-month period. Additionally, issuing firms must now disclose specific financial information and satisfy supplementary fiscal reporting requirements.

The Reform Creates a New Industry

The laws also mandate that the new investor class and issuing firms conduct trading through third-party equity crowdfunding companies. The government holds these companies, called funding portals, legally accountable for the transactions they manage and process.

Many funding portals have entered the financial marketplace to facilitate this new trading mechanism. The institutions offer investors a promising solution for reaping investor benefits as well as accumulating crowdfunding equity at brokerages such as:

  • Crowdfunder
  • DreamFunded
  • EquityNet
  • StartEngine
  • VestLo

Companies like these have opened their doors at an alarming pace. Optimists hope that the institutions will perform better than previous options such as Kickstarter and Indiegogo, and believe that the Regulation Crowdfunding Act will permit startups and concepts to come to market faster, resulting in rapid economic development in the near future.

It is important note that previous crowdfunding platforms rewarded investors with goodwill and only accepted donations. Title III allows investors to buy real equity and reap financial disbursements if the issuing firm shows profit; Title III crowdfund investors can now own the companies they invest in alongside venture capitalists.

The Reason Behind the Change and Its Impact

Legislators created the Regulation Crowdfunding Act to increase the financial backing made available for new and existing small businesses. Lawmakers enacted the JOBS Act, not only to spur business growth, but also to create more work for Americans – as the JOBS acronym implies. The legislation represents the first time the United States has revised investment regulations since the Securities and Exchange Act of 1933, allowing non-accredited investors – those with less than $200,000 in annual income or a one million dollar net worth – to assume crowdfunding investment risks.

The Investment World Reacts

President Obama approved the legislation in April 2012. Initially, there was little interest as legislators put Title II – allowing firms to solicit investments – and Title IV – establishing new crowdfunding investment rules – in place quickly. However, now that Title III is in place, there is tremendous interest now that the investment vehicle is available to a huge new market.

Legislators Call for Amendments

More legislation, such as North Carolina Congressmen Patrick Henry’s Fix Crowdfunding Act, looms on the horizon. The House and the Senate have yet to visit the proposal, which could enhance the JOBS Act. For instance, Henry’s amendment, also called HR 4855, would allow issuing firms to poll investor interest before committing to a fundraising round, a privilege that could save issuers massively by allowing them to bypass offerings that lack public demand.

Reform Supporters Want More

OneVest venture capital firm head Alejandro Cremadas proposes opening the market up even more by raising the annual cap from one to five million dollars. In a letter to Congress, the executive cited that most new firms receive investment infusions that near two million dollars during their initial fundraising rounds and that the current regulatory cap will hamper startup growth. Alternatively, the OneVest chair suggests, the legislature should allow issuers to seek crowdfunding from accredited and non-accredited investors simultaneously. He points out that this tactic will result in higher legal fees but notes that the resulting fundraising will satisfy those expenses.

The JOBS Act is a sweeping change that has opened the crowdfunding market up to a wider audience. The reform has created a new equity crowdfunding industry, which lawmakers require to maintain order in the market. Ultimately, the government hopes that the changes will create economic opportunities for the labor pool, and while financial leaders welcome the reform, they desire more changes so that the measure will work as its creators intended.

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Sources

http://www.crowdfundinsider.com/2016/05/85696-title-iii-crowdfunding-became-legal-on-may-16-what-it-does-whats-still-lacking/. Accessed 2016

http://www.inc.com/john-boitnott/how-new-crowdfunding-laws-are-giving-amateur-investors-the-insider-track.html. Accessed 2016

https://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf

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