New Crowdfunding Rules for Issuers: Opportunities or Landmines? - Part III
WilmerHale Senior Associate Jessica Wade is a co-author. This is the third post in our three-part blog post exploring Regulation and its provisions before the final rules become effective on May 16, 2016.
Practical Takeaways from Regulation
When Congress adopted the in April 2012, many budding entrepreneurs rejoiced at the prospect of easier and quicker access to capital to turn their ideas into money-making ventures. These entrepreneurs envisioned joining their tech-savvy competitors and colleagues in the new world of “,” where vie for average investors' dollars through website offerings unencumbered by the strict rules and regulations that govern other types of financings. In an economic environment in which traditional paths to capital for entrepreneurs, such as small business loans, can be difficult to access, offered what looks like an attractive funding alternative.
Despite its theoretical promise, the balance between facilitating broader and meaningful access to the capital markets to smaller companies and providing adequate protections for a large group of new and potentially unsophisticated investors has proved to be a hard one to strike. Indeed, in the itself, Congress imposed a number of significant statutory restrictions on and mandated the SEC to undertake substantial rulemaking to implement them. Thus, while the SEC certainly had some discretion through the rulemaking process, a number of the investor protection measures, including limits on investment amount, and mandatory use of intermediary platforms were directly required by Congress. While the rules the SEC proposed in October 2013, would liberalize the ways in which can raise money, commentators believed that the burdens of the mandated disclosures, financial statements and other ongoing reporting requirements would seem likely to discourage smaller companies from raising capital through . The final rules are essentially the same as those originally proposed in October 2013. The most notable change from the proposed rules to the final rules is that financial statements only need to be reviewed by an independent public firm (instead of audited) for offerings of more than $500,000 but less than the $1,000,000 aggregate cap.
An considering a crowdfunded offering will need to weigh the costs and benefits of compliance with the regulations, including whether it has available the required financial statements and, more importantly, whether it is willing to publicly disseminate those financial statements and other information about its financial condition and business mandated by Form C. The should work closely with its lawyers and accountants to understand the expected costs and associated with the initial filings and ongoing compliance with Regulation . In addition, the should consider the impact of having a large base early in its lifecycle, including the administrative costs and challenges associated with .
It remains to be seen whether Regulation strikes a feasible balance between facilitating capital formation and protecting investors. Some proponents remain optimistic that the final rules will facilitate a responsible emerging industry that will provide entrepreneurs with the capital they need to turn their ideas into reality.