Alternative Finance in the U.S.A.
In recent years, crowdfunding has seen a substantial increase in popularity. Although crowdfunding sites are commonly used to facilitate donations for charitable purposes, they are more frequently being used as an investment platform, whereby investments are made in exchange for equity, profit or revenue sharing. As would be expected, this has raised significant questions regarding securities regulation.
In 2012, the United States Congress passed the Jumpstart Our Business Startups Act (JOBS Act) to address this growing trend. Under the JOBS Act, an issuer would be exempt from the SEC’s registration requirements when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies other conditions in the JOBS Act. One of these conditions is that issuers utilize the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.
Although the Act mandates that the Securities and Exchange Commission (SEC) issue final rules within 270 days of enactment (which would have been January 5, 2013), the SEC has yet to do so. It is expected that final rules will be introduced in October 2015. However, the proposed rules released on October 23, 2013 provide insight regarding what form the final rules may take. Under the proposed rules, companies would be permitted to raise up to $1 million a year through crowdfunded transactions. Investors with an annual income and net worth of less than $100,000 could invest the greater of $2,000 or 5% of their annual income or net worth, per year. Wealthier investors could invest 10% of their annual income or net worth. Under current the current SEC rules, companies are permitted to sell unregistered securities only to “accredited” investors (defined as any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000).
More recently, legislation was introduced which would allow companies to raise up to $3 million a year, or $5 million if the company makes audited financial statements available to prosective investors. Investors could invest the larger of $5,000 per year, 10% of their annual income, or 10% of their net worth. This legislation has not (yet) been passed by Congress.
While Congress and the SEC are still grappling with federal regulations pertaining to crowdfunding, several states have taken the matter into their own hands. For example, Georgia, Kansas, Michigan, Alabama, Maine, Wisconsin, Indiana and Texas already have laws and regulations that allow crowdfunding within the states. (Since these are state laws, their effect is limited to intrastate transactions; residents of one state cannot take advantage of the investment opportunities available in another state.) Almost fifty percent of the states have taken steps towards enacting their own intrastate regulations pertaining to equity crowdfunding.
Generally the states’ laws mirror the federal legislation. For example, in Texas, a company can raise up to $1 million a year through an approved Texas crowdfunding portal. Any resident of Texas can invest up to $5,000 per company, but accredited investors (individuals who have assets of more than $1 million excluding their home and net income annually of $200,000) may invest any amount. Only Texas residents are able to invest in the deals and only Texas crowdfunding portals are able to manage those investments. In Indiana, companies can raise up to $2 million per year and investors may invest up to $5,000 per opportunity. In Wisconsin, companies can raise up to $2 million per year if they provide audited financials, or $1 million without them. “Certified investors” with a net worth of $750,000 or an annual income of $100,00 have no annual investment cap; all others are permitted to invest up to $10,000 per year.
The state of crowdfunding regulation is still unsettled in the United States, but there is a certainly a strong momentum towards facilitating an open, relatively unrestricted, and small-business friendly platform for raising capital. It is yet to be seen whether the ultimate rules enacted by the SEC will allow have the intended effect of igniting the type of start-up economic activity Congress and the President intended.