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Initial Results Validate Crowdfunding Reforms

Beginning in 2012 America started a bold experiment to prove that:

  • Less is more; and,

  • Addition by subtraction works.

The experiment tested whether reducing government regulation would produce better economic results.  Specifically, securities law prohibitions against businesses using the Internet, social media, and other technology to talk with potential investors were eliminated.  Regulations still require businesses to disclose the same information to investors (so anti-fraud rules remain strong), but after the amendment of the regulations (including "Regulation A") businesses now have greater flexibility about how to communicate and the most appropriate media to use for that communication.

Breaking the Money Gatekeeping Monopoly—Capitalism Without Capital Does Not Work

Rocket ship, CrowdfundingThe JOBS Act of 2012 rewrote most of the old regulations about how most American businesses raise capital, because:

  • Capitalism doesn't work without capital.

  • How can you raise capital if you can't talk with investors?

The JOBS Act's remedy is what I call the "seven fingers of the crowdfunding fist" that American businesses are using to pound down the doors that have historically locked up capital in traditional financial institutions (commercial banks, investment banks, venture capital, private equity, and mutual funds).  Before the 2012 reforms, securities laws restricting communications gave these gatekeepers a monopoly on deciding where ordinary Americans would invest their money.  Although people have been Internet shopping for more than two decades, including for big ticket items like cars and houses, securities laws prevented Americans from doing the same thing when shopping for investment opportunities.  Now, since the reforms, crowdfunding gives ordinary Americans tools to decide:

  • Where to invest their money; and,  

  • Whether gatekeepers should continue to make decisions for them.

The Seven Fingers of the Crowdfunding Fist

The tools people are now using to directly invest their money in private companies include:

  • Two types of Rule 506 offerings;

  • Two types of Regulation A offerings;

  • Two types of state Crowdfunding offerings; and,

  • Section 4 (a) (6) Regulation Crowdfunding offerings.

 All these rules permit businesses to use the Internet and other means to talk directly with potential investors rather than going through institutional gatekeepers.

Startling Regulation A Initial Results 

This new freedom created by the 2012 amendment of Regulation A raised the questions, "Will Americans invest online?"  and, "Is investing inherently different from shopping?"

The SEC's November 2016 White Paper definitively answered these questions with statistics concerning the effect of crowdfunding in the first 16 months following the SEC's amendment of Regulation A.

Before the amendment, Regulation A was like a bridge to nowhere—during the two previous decades, America averaged only five Regulation A offerings per year.  But the SEC's White Paper reported that during the first 16 months after amending Regulation A:

  • 147 Regulation A offerings were filed seeking to raise $2.6 Billion;

  • 81 offerings were approved by the SEC seeking to raise $1.5 Billion;

  • $190 Million was reported raised (this understates the actual amount raised, because issuers are only required to report sales after their offering terminates);

  • $18 Million was the average offering maximum size;

  • 60% of approved offerings were for Tier 2 offerings;

  • Two thirds of issuers had no revenue and only 20% were profitable; and,

  • The median offering took 78 days to complete the SEC's review process.

Most offerings were best efforts and were self-underwritten by issuers who had previously raised capital in private offerings.  That means that American businesses were not using traditional Wall Street investment banks.

The bottom line is that American investors are walking through the capital-raising door that crowdfunding opened and are taking charge of where their money is going.

So, why is amended Regulation A becoming so popular?

Why Issuers Like Regulation A

Issuers like Regulation A because they can now:

  • Test the market before filing documents with the SEC;

  • Sell to both accredited and unaccredited investors;

  • Use social media and other advertising to sell their offering instead of paying large investment banker fees;

  • Raise up to $50 million each rolling 12-month period;

  • Make continuous offerings over long time periods by updating disclosures instead of starting a new offering every year;

  • Provide liquidity to existing shareholders by letting shareholders sell in the offering;

  • Avoid becoming a full SEC reporting company because Regulation A includes exemptions from Section 12 (g) public registration requirements (issuers in Tier 2 offerings do have to file semi-annual reports with the SEC); and,

  • Reduce pressure from investors to sell the business before maximum value is achieved because issuers can provide liquidity to investors by facilitating private trading markets since shares sold in the Regulation A offering are not "restricted securities."

Why Investors Like Regulation A and Other Crowdfunding Tools

Investors like Regulation A and other crowdfunding offerings, because:

  • They can diversify their private investments by investing as little as $1,000;

  • It's easy to comparison shop by looking at many investments;

  • They can direct their money to businesses in their local communities or to support businesses whose products or services promote social causes or other personal interests of investors;

  • Their transaction fees are relatively low;

  • Non-accredited investors who were excluded from participating are now allowed to get into deals.

Summary

Crowdfunding gives businesses many new choices when raising capital.  It also gives investors the ability to control where their money is invested because they can talk directly with businesses instead of going through professional gatekeepers.  The SEC's White Paper shows that businesses and investors are responding positively to the new opportunities created by amended Regulation A and other crowdfunding offerings.

© 2022 Ward and Smith, P.A.. All Rights Reserved.National Law Review, Volume VII, Number 68
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About this Author

Since the sweeping labor and employment laws of the mid-1960s, employers have faced an ever-increasing number of laws and regulatory agencies governing their businesses and employee relations.  Numerous federal and state laws have been added to the Equal Pay Act (1963), Title VII of the Civil Rights Act (1964), and the Age Discrimination in Employment Act (1967) including, but not limited to: the Family and Medical Leave Act, the Employee Retirement Income Security Act, the Occupational Safety and Health Act, the Americans with Disabilities Act, and the North Carolina...

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