The Title III regulations, which I wrote about earlier, are now a reality… so cry havoc and unleash the crowdfunding marketplaces.
The rules that were passed are slightly different from the ones I’d enumerated earlier and lawyers and crowdfunding companies (and there are a lot of them) are already pitching me about how the regulations are going to work and what they’re going to mean.
The differences between the final rules and the preliminary ones boil down to the following: audits aren’t required for first-time crowdfunding offers, either at issuance or in their annual reporting; safe harbor for secondary transactions to maintain investor exclusion from mandatory reporting thresholds; a safe harbor clause for companies using registered agents to manage their books; permission for portals and platforms to buy and receive company private stock as compensation; and better controls for portals to manage directly what issuers can list on their platforms.
Fundamentally, this rolls back rules and restrictions that were put in place during the Great Depression to protect everyday Joe Q. Public from scams. For some, the regulations were the definition of anti-American, restricting access and opportunity to a select group of accredited investors, to others they were necessary protections to prevent the rampant fraud and outright theft that marked the wild years of America’s early growth.
“Ten years from now, they’re going to say: ‘Can you believe, before 2015, for 90 years they didn’t allow people to invest in companies that they cared about,” says Slava Rubin, chief executive of Indiegogo, one of the first crowdfunding sites. “It’s a total game changer.”
It’s also something that Rubin has been waiting for since he launched the company in January 2008. From the very beginning Rubin wanted Indiegogo’s backers to be able to participate in the financial upside of backing campaigns, but the regulatory environment wasn’t conducive. So instead, it was product benefits and other perks that Indiegogo’s backers received.
Now that’s going to change. Already $500 million worth of venture funding has followed on to the $750 million that’s been committed through the Indiegogo platform. And Rubin wants regular investors to be able to participate in the same opportunity as well.
Indeed, Rubin says the company has been laying the groundwork for opening up the platform to equity investors for a while. “I don’t have a definitive answer for when we’ll be launching something,” he says. “We will be looking at when is the right time to bring something to market.”
By contrast, Kickstarter won’t be working on equity crowd investing. The thing that helped the company make the decision was the focus on its mission which is to help bring creative projects to life, according to spokesman Justin Kazmark. For creators, what they enjoy is holding 100% creative control, Kazmark says. “Backers, can be motivated by a lot of things, but they’re not motivated by making a buck off of the artist,” he says.
The decision is interesting, given the furor that surrounded what is perhaps Kickstarter’s largest financial success, when Facebook bought the maker of the Kickstarter-funded Oculus VR project for roughly $2 billion in cash and stock.
The progenitors of crowdfunding may be taking separate approaches to the decision, but the hundreds of funding platforms that they spawned are universally embracing the new regulations.
Investment gateways ranging from Propelx, which bills itself as a financing service for “deep technology” companies, to the New York-based real estate investment platform, CityFunders, which provides real estate investment opportunities for accredited investors, are all applauding the new rules.
“There are Popular Science readers who are engineers and inventors and enthusiasts and if they can participate in this than they must,” says Swati Chaturvedi, the chief executive of Propelx “We have one company that’s developing a space propulsion device and we had NASA scientists weigh in on this, but they weren’t accredited investors so they couldn’t invest,” in the company they’d vetted, said Chaturvedi.
Beyond the billions of untapped investment dollars that could potentially flood into small business financing, there are going to be tremendous benefits for the secondary markets that will provide liquidity to these new investors.
Money invested in small businesses will need to make a return, and that will require unregistered securities to become much more liquid than they are currently (suddenly the Nasdaq acquisition of SecondMarket looks even more prescient).