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Sunday, 08 November 2015 21:34

SEC finalizes equity crowdfunding rules

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The adoption of final federal rules to allow equity crowdfunding now puts the focus on who will actually use it to raise capital for their business or to make an investment.

The long-awaited action by the U.S. Securities and Exchange Commission opens up the ability for entrepreneurs to sell shares and raise up to $1 million from investors over 12 months through a crowdfunding platform. If they meet certain provisions in the rules, investors can put up to $100,000 into crowdfunding offerings during a 12-month period.

Proponents of equity crowdfunding who have waited more than three years for the SEC to finalize the rule say it provides a new platform for startup companies and small businesses to raise needed capital from non-accredited investors.

“You’re looking at a law that allows a lot more people to invest, theoretically. If that follows through, you’re going to have a lot more people taking advantage of investing in startup companies and access to capital will be tremendously increased,” said Thomas Coke, founder of Grand Rapids-based CampusStarter LLC that seeks to match college students seeking capital with prospective investors from their school’s alumni base.

“This is an opportunity for them to tap into a different market,” Coke said.

The federal rules will take effect in mid-2016.

Coke and others are interested to see how equity crowdfunding unfolds. Their expectation is that it initially will generate high interest. Once the novelty wears off and after entrepreneurs and prospective investors absorb the 685 pages of rules, it will then progress slowly and find its rightful place in the market and capital continuum.

“I don’t think we really know what’s going on yet,” said Matt Bower, an attorney and partner in the Detroit office of Varnum LLP who works in venture capital financing. “It may take some time before companies and investors are comfortable with this new means of investing. It will be interesting to see how it’s used and how it evolves.”

Jeff Van Winkle, a member of the corporate and securities practice group at the Grand Rapids office of law firm Clark Hill PLC, expects high interest and a “flurry of activity” at first. Portals will develop that target niches such as tech-based business, real estate or the Main Street companies, Van Winkle said.

“I believe there will be a lot of initial enthusiasm and there will be some (businesses) that will try it out. There will be a lot that look at it and ultimately won’t go down that path, but it will build over time,” he said. “Fundamentally, investors in the U.S. and issuers want to find a modern, effective way to connect when they have common interests. And the interest is that businesses want to find investors that are aligned with their growth, and investors want to do something other than put money in a mutual fund. This will accomplish that, but it will take longer than we think.”

Van Winkle sees equity crowdfunding as a tool used primarily by retail or service businesses seeking to expand or open a new location or for a so-called Main Street business to raise startup capital from local investors.

In the final rules, the SEC sought to balance allowing a new tool for small business to raise capital with investor protections. They establish public disclosure and regulatory reporting requirements for companies that include audited financial statements, depending on the size of the offering. Companies doing an equity offering for the first time could provide reviewed rather than audited financial statements.

Crowdfunding portals that host equity offerings will have to register with the SEC and become a member of the Financial Industry Regulatory Authority, or FINRA, a national securities association.

Despite the promise of equity crowdfunding, an offering will come with a price. Companies will incur fees from professional advisers such as attorneys and accountants for preparing an offering, much like they would have to do for a private placement with accredited investors.

There are also fees charged by portals to post an offering, Van Winkle said.

“One practical result is it is not a cheap alternative to raising capital,” Van Winkle said.

Coke said he “wouldn’t be shocked” if the costs to do a large equity crowdfunding offering totaled in the “tens of thousands of dollars.” The cost represents one of the biggest drawbacks to an offering, he said.

“The cost is going to be higher than a lot of people think,” Coke said. “You’d like to see it be a little bit easier for entrepreneurs.”

Still, he added, if you are an entrepreneur raising a lot of money, “you should be doing those things” anyway.

To date, companies raising capital through crowdfunding have been limited to debt or rewards-based offerings. For instance, an investor may receive the right to pre-order a new product prior to its introduction to the market.

Read 3449 times Last modified on Friday, 13 November 2015 17:24

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