On 27 January 2014, Securities and Exchange Commission (SEC) Chair Mary Jo White gave the keynote address to the 41st Annual Securities Regulation Institute. In her speech, she discussed the important role that crowdfunding would play during 2014 in the United States. In late 2013, the SEC unanimously supported proposed legislation under the Jumpstart Our Business Startups Act (JOBS Act) so that companies could offer and sell securities through the medium of crowdfunding.
White's comments in conjunction with the SEC's earlier announcement present a big step in the United States to recognise crowdfunding as a legitimate method to raise capital. Within the JOBS Act, Title III created an exemption to bypass the provisions which govern selling securities to individuals. This aims to address what many see as a funding gap for start-ups between the 'family and friends' round of funding to the seed round.
Under the proposed rules:
• A company could raise up to a maximum aggregate amount of $1m through crowdfunding over a twelve month period.
Investors over a 12-month period could invest up to:
• $2,000 or 5 per cent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000; or
• 10 per cent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
Investors are to be protected through the regulation of intermediaries. Under the JOBS Act there is a condition that crowdfunding transactions occur on SEC approved and registered platforms, referred to as a 'funding portals'. Thus, intermediaries will be obligated to, inter alia, educate investors, take active measures to limit the potential of fraud, as well as, provide information on the securities being issued and the issuer themselves.
Not to be outdone by the SEC, in the UK, the Financial Conduct Authority (FCA) released consultation paper 13/13 on its approach to crowdfunding and 'similar activities' (including P2P lending). This consultation was a welcomed steer from stakeholders, as crowdfunding now represents a market worth about £360m in the UK
Among proposals outlined in the paper are requirements that crowdfunding portals shall be restricted in the type of retail clients they communicate direct offers of financial promotions in unlisted shares or debt securities to.
[Turn to next page]