Posted December 10, 2015

Federal Reserve Vice Chair Fischer delivered remarks at the “Financial Stability: Policy Analysis and Data Needs” 2015 Stability Conference sponsored by the Federal Reserve Bank of Cleveland and the Office of Financial Research. Here is discussed financial stability and shadow banking.

Vice Chair Fischer believes that there are “five factors that contribute to financial fragility”: (a) high debt burdens at households and firms; (b) elevated leverage and maturity transformation within the financial sector; (c) complexity and interconnectedness in intermediation chains; (d) low risk premiums on assets, especially assets funded with debt; and (e) complacency on the part of investors, supervisors and decision-makers in the private sector of the financial system.

During Vice Chair Fischer’s presentation he offered an assessment of vulnerabilities in the financial system; and identified gaps in the current understanding of conditions inside and outside of the banking sector that should be addressed by regulators and researchers.

He stated, “An essential element of [the federal regulatory] infrastructure is learning the lessons of history – both the lessons of what happened, and the fact that supervisors and regulators will on occasion be surprised”.

Mr. Fischer made the following assertions regarding what needs to be understood to monitor financial stability:

• A Closer Look at Shadow Banking: The reduction in leverage and maturity transformation associated with better regulations leaves the financial system “much more resilient – even if such regulations have modestly affected market liquidity.”

• What We Know and What We Do Not: Data on a range of activities – including securities lending, bilateral repos, and derivatives trading – that create funding and leverage risks “remain inadequate and hence could prove destabilizing if sufficiently large or widespread.”

• Data Are Not Enough: We Need Theory Too: An “important area in need of development” is economic modeling on interconnectedness, particularly on the interaction of shadow banking, banks and the broader financial system. Further, research that distinguishes between banks and nonbanks, or highlights how their interactions are driven by economic incentives, could guide regulator efforts to collect data and set policies to limit possible instabilities associated with interconnectedness.

Though Vice Chair Fischer made no mention of the alternative investment landscape of P2P Lending, it will be interested to see where Peer -to- Peer Lending Marketplaces will be placed as related to shadow banking as a contributor to financial stability in the coming years.

As of December 9, 2015, FINRA extended the review period for its proposed funding portal rules to January 26, 2016. The new rules were promulgated pursuant to the Jumpstart Our Business Startups Act 2012 (JOBS Act) which “prohibits funding portals from a variety of activities, including offering investment advice or recommendations, soliciting transactions for securities displayed on their websites, compensating employees for securities solicitations, and holding investor funds or securities.” The proposed rules under review are (i) funding portal rules 100, 110, 200, 300, 800, 900 and 1200; (ii) related forms; and (iii) FINRA Rule 4518 (“Notification to FINRA in Connection with the JOBS Act”).

See: FINRA’s Extension of SEC Review Period.

October 28, 2015, posted by Kim Wales

Three years after the Securities and Exchange Commission released proposed rules for Title III, Regulation Crowdfunding, news was released yesterday that the Commission will take a vote on whether or not to release the final rules for Title III on Friday, October 30, 2015.

Given the challenges with the 653 pages of proposed final rules, I am hopeful that commission took into account the 300+ recommendation letters, numerous meetings and sideline protest that would amend the final rules into a usable form.

There were many changes requested but the top 3 included:

1. Increasing the maximum raise from $1 million to $5 million during a 12 month period.
2. Raise the cap from $500k to $750k before requiring the issuer to provide audited financial statements and to remove the yearly mandate.
3. Remove the Liability on funding platforms, see page 280.

The meeting at the SEC is open to the public. It is scheduled to take pace at 10:00 AM in the Auditorium Room (L-002). The proceedings are expected to be live-streamed on the SEC web site.

The SEC outlined the meeting:

1. The Commission will consider whether to adopt rules and forms related to the offer and sale of securities through crowdfunding under Section 4(a)(6) of the Securities Act of 1933, as mandated by Title III of the Jumpstart Our Business Startups Act.
2. The Commission will consider whether to propose amendments to Securities Act Rule 147 and Rule 504.

October 28, 2015, posted by Kim Wales

Christine Farnish, Chair of the Peer-to-Peer Finance Association (P2PFA) announced new operating principles that will enhance risk management and promote transparency for the sector.

Over the last 12 months, data collected by P2P FA showed that almost £2bn worth of new lending in the EU P2P industry  from consumers, small businesses and property lending almost doubling.

The new guidelines require P2P association members to publish debt data to a common standard, make their loan books transparent and ensure that retail investors are competing on the same level playing field as institutional investors.

“Our new operating principles set a benchmark of fair dealing and transparency,” said Christine Farnish, Chair of the P2PFA.  “By the New Year, all our members will publish their full loan books, show bad debt losses in a comparable way, and commit to ensuring that retail investors get a fair deal compared with institutions.

“These new measures will help build further consumer confidence, demonstrate our commitment to ethical practice and set a beacon of good practice across the market.”

You can see a copy of the new guidelines here:

CrowdFundInsider spotlighted the rising popularity of SME Bonds in a July 10^th article authored by JD Alois. The article included commentary from Anthony Puls, Founding Director & Chairman of ASSOB and one of the trailblazers in the investment crowdfunding space. SME Bond are already available in Australia and New Zealand and target startups and early stage companies seeking to raise capital through crowdfunding. Puls expects SME Bonds to be available in the United States and Canada soon.

According to Puls, ““Entrepreneurs often require some initial seed funding to cover consultant’s fees; investment offer documentation; promotional videos; crowdfunding platform listing fees, etc. This is where the SME bond fits in.”

As outlined in the article, SME bonds have several advantages:

• As a debt/equity hybrid, SME bonds are a cost-effective method to raise capital of up to $150,000. The bond is a debt interest that may include an interest rate but instead of paying cash – it delivers equity to the investor once it is “converted”.

• An SME bond is a private treaty between an entrepreneur with an early-stage business and an early supporter who wants to back that entrepreneur. It can also be suitable for an investor that finds an entrepreneur with a great idea or business opportunity. It’s a one-on-one transaction.

• An SME bond starts off as a loan/debt and is only converted when the issuing company undertakes a share (stock) issue.

“SMEs have witnessed traditional sources of funding dry up since the 2007–2013 financial crisis and are seeking financing through alternative methods such as peer-to-peer loans, securities based crowdfunding, Enterprise Investment Schemes and mini-bonds.  The capital market needs initiatives such as SME Bonds to provide leverage to the stifled economy,” said Ms. Wales.

Click here to read the full article.

July, 1, 2015;

Issue 41 of the Capco Journal of Financial Transformation released. In this issue Capco focuses on the existential crisis embroiling finance. The lead article, by Kim Wales, Regulation and Cyberfinance: A new economic revolution liberating financial markets? Seeks to answer some of the questions driving this debate: What is currency? What is value? What is a business? What is a bank, even?

You can read the lead article in Issue 41 here.

July, 1, 2015, Originally posted by ESMA,

the European Securities and Markets Authority (ESMA) issued today a Questions and Answers (Q&A) solicitation in order to promote the sound, effective and consistent application of rules on anti-money laundering and terrorist financing to investment-based crowdfunding platforms. The Q&A aims to promote common supervisory approaches and practices in the application of anti-money laundering rules to investment-based crowdfunding. It provides responses to questions posed by national competent authorities in the course of ESMA’s work on investment-based crowdfunding, drawing on expert input from the Joint Committee sub-committee on Anti-Money Laundering.  The Q&A is aimed at national competent authorities to support them in ensuring that their supervisory approach is effective, taking into account the characteristics of and risks associated with different aspects of investment-based crowdfunding platforms.

Not all invstment-based crowdfunding platforms have the same regulatory status. Some are within the scope of the Markets in Financial Instruments Directive (MiFID); others fall within the optional exemption provided by Article 3 of that Directive where they may be regulated under specific national regimes; others may fall outside the scope of MiFID and of those some are regulated under national law, while others are not. There are also other EU rules potentially relevant to investment-based crowdfunding platforms, such as the Payment Services Directive (PSD).

Those platforms which operate within MiFID are automatically subject to rules designed to combat money laundering and terrorist financing under the Third Anti-Money Laundering Directive (3AMLD). ESMA has sought to clarify the status of the other platforms, by analysing the potential risks and issues arising in different cases and their treatment under the applicable EU rules.

Money Radio’s popular “Financial Review with Sinclair Noe” Radio Show interviewed Kim Wales on April 30, 2015 regarding the JOBS Act and timely issues of importance to small and emerging businesses seeking to raise capital. Listen here.

As a nationally recognized expert on crowdfunding and a thought leader on the JOBS Act, Kim Wales conducted the interview in Phoenix where she was in town to serve as a speaker and panelist at the Annual Conference of The Women Presidents’ Organization.

Some of the recent updates that Kim shared spanned how after three years of the JOBS Act being legalized, Regulation Crowdfunding is still not live. But with all things regulatory and as a major contributor to the final rules, Kim quickly explained why the market should be interested in Regulation A+ as a game changer. It is effectively a mini-IPO for small and emerging companies. At present, individuals and small, emerging growth companies (less than $1B in annual revenue) may go online and raise funds but now both accredited and non-accredited investors may participate. Non-accredited investors can invest up to 10% of their net worth or annual income in any one of these opportunities, thus democratizing the capital markets for small offerings.

“We are one step closer to what is hoped for in Title 3 and the next phase of the JOBS Act, but we still are not 100% there,” Kim stated. For example, cost structures may prevent start-up entrepreneurs from being able to raise money for their business. Blue Sky Law has been preempted so you no longer have to comply with state laws but instead may file at the federal level with the SEC for Tier 2 offerings and issuers can raise up to $50 million.

Overall, Kim believes that new regulations will stimulate job growth and that, by putting money in the hands of entrepreneurs who create at least 64 percent of net new jobs, small businesses will flourish.

Speaking at the Annual Conference of The Women Presidents’ Organization— the 2015 International Conference, Kim’s talks focused on the democratization of capital and what it means for those who seek to raise money for their business as well as how investors can identify opportunities in the marketplace.

Click here to listen to Kim Wales on Money Radio’s “Financial Review with Sinclair Noe.”

By: Kim Wales (NY) — 03/25/2015

Today marks another milestone in the life cycle of the Jumpstart Our Business Startups Act (JOBS Act) — Regulation A+ is approved. With the three-year anniversary only two weeks away and after many recommendations submitted by myself and fellow colleagues, the Securities and Exchange Commission voted unanimously on the adoption of Title IV: Regulation A+ for small securities offerings.  This is a big step towards furthering the democratization of the capital markets for emerging growth companies.

“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”

Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).

The rules will be effective 60 days after publication in the Federal Register.

Here are some highlights for the adoption of Regulation A+. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.

1. State Blue Sky preemption and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings.

2.  Tier 1 issuers can raise up to $20m rather than the limited $5m maximum in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.  The coordinated review process by NASAA will only be used for tier 1 offers.

3.  Tier 2 offers and issuers can raise up to $50m in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.

3. Regulation A+ offerings are exempt from the mandatory 12(g) registration thresholds – so long as the issuer engages services of a registered transfer agent, remains subject to and current in a tier 2 reporting obligation and meets public float and revenue requirements similar to those in small reporting companies and exchange act rules.  The details of the reporting rules should be included in the final rules.

4. The JOBS Act mandates the Commission to review Tier 2 limits every two years.

5. Issuers raising capital using Regulation A+ may submit draft offers to the SEC staff, use electronic filing process on EDGAR, ability to use test the waters solicitation materials both before and after the filing of the application process.

6. Additional Tier 2 Requirements:

– Financial statements included in the circular will be audited annually.

– Semi and annual outgoing reports and current event updates that are scaled to Regulation A offerings.

– Limit the number of securities, non-accredited investors can purchase, up to 10% of the greater of annual income of net worth natural person; and

– Limit the purchase of 10% of the greater of annual revenue or net assets of unnatural persons.

– Issuers will use Form 8a — short form registration statement concurrently with a qualification Regulation A offering statement to register securities class 12(b) or 12(g) of the total package of investor protections to be included in the implementation of Reg A offer.

“Moving Title IV forward is a positive step in stimulating the economy, however, start-ups will still find it challenging to raise money using Reg. A because the cost and process  remains burdensome for this stage of company, says Kim Wales, founder of Wales Capital.” As an advocate for the JOBS Act and policy reform, “we still need to get the rules released for Title III and raise the limits up to $5 million and exclude investment limits for accredited investors” as prescribed in my recommendation letter “Limitation of Capital Raised,” February 23, 2014. “This is the part of the JOBS Act that will help all people.”

Foreign Affairs — 02/12/2015

Industry thought leaders convened in NY  for the Foreign Affairs: Cryptocurrency Policy Reform conference.  The discussions included three pillars:

• The future of payment: Integration into Mainstream Systems
• Anti-Money Laundering: Current and Future Regulation
• Consumer Protection: Insuring Users and Investors Against Fraud