A new legal framework changes the rules of the game for U.S. crowdfunding
By Andrea Hayley, Epoch Times | April 26, 2016Last Updated: April 27, 2016 10:21 am
Crowdfunding—an online method of soliciting money from the general public for a business, project, or cause—is about to go through a seismic shift. And it could mean insane profits for some investors—profits that were previously unattainable due to government regulations.
CrowdFundInsider spotlighted the rising popularity of SME Bonds in a July 10th 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.
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.”
On a warm Fall, October evening in New York, some of the securities crowdfunding industry pioneers, advocates, policy influencers and solution providers gathered at the Law offices of Pepper Hamilton for Dara Albright’s Regulation A+ event. David Weild, the founder of Issuworks and former ex-Vice Chairman of NASDAQ, closed the evening with an impassioned message about what steps are needed to spur capital formation that will start moving money into the hands on entrepreneurs and main street investors.
Unlocking the capital markets for small cap and mid cap businesses using the JOBS Act, Title IV (Regulation A+) is top of mind after 7 years of stagnant economy. This has become the mission for everyone in room such as Brian Korn (Pepper Hamilton), Peter Einstein (Crowdfund4All), Sara Hanks (CrowdCheck), Douglass Ellenoff (Ellenoff Grossman and Schole, Kim Wales (Wales Capital and CrowdBureau), and Sam Guzik (Guzik & Associates), Chris Tyrrell (OfferBoard) and Manolis Sfinarolakis (Crowd RealityTV) to name a few. However, Weild was very clear in his messaging, “NASAA is doing incredible harm to the economy and they need to stand down.”
The North American Securities Administrators Association (NASAA) is a special interest group that represents state securities regulators. Ironically they have taken an anti-business / anti-investor approach by attempting to block Title IV (Regulation A+) of the JOBS Act – otherwise known as Reg A+. Regulation A+ includes the biggest opportunity presented by the Securities and Exchange Commission’s (SEC) proposal for preemption of State Blue Sky in 40 years. In addition, qualified purchasers can invest up to 10 percent of their net worth. Finally, Title IV of the JOBS Act increases the offering limit from $5 million to $50 million in a 12 month period.
NASAA aggressively lobbies Congress and has hired high powered attorneys to stop state blue sky preemption for certain private placements. Small businesses creates 64% net new jobs for the economy which is the vast majority for U.S. and should be the engine for economic growth. However, at play is protecting revenue stream and power at NASSA; that is thwarting the opportunity for small and emerging business to thrive and survive.
In addressing NASAA’s concerns, Weild aptly points out that state regulators will continue to have anti-fraud laws which they can use but calls their present stance “laughable”. “If you want to stop all fraud lets just stop all business …We all know that is not the right answer,” says Weild.
While there are clearly members of NASAA that disagree with this anti-business policy for now the group has paradoxically taken a position that is to the detriment of the economy. Weild also tackles other issues that are in need of regulatory change, including tick size reform, that are bogging down small cap IPOs.
David Weild’s closing address is a must watch for Anyone who is pro-economy and pro-small business :