The Securities Exchange Commission finally voted to release the proposed rules for Title III of President Obama’s JOBS Act, which will permit startups and intermediaries (funding portals) to finally participate in equity-based crowdfunding—allowing non-accredited investors to invest in crowdfunded offerings for the first time in 80 years. Entrepreneurs can now sell securities online to anyone who believes in their companies.
With Title III in place, investors don’t have to have $1 million net worth in order to invest in small businesses. Commissioner Kara Stein noted in a release that the rule would allow investors to use the wisdom of the crowd to identify and reward good ideas.
Oregon’s Senator Jeff Merkley, one of the drafters of the crowdfunding provisions in the JOBS Act, has stated: “This law will make sure entrepreneurs can use online tools to find investors, and make sure investors can put their money into exciting projects without worrying about getting ripped off.”
This major shift in securities laws could mean the emancipation of capital for minority and women-owned businesses, who traditionally have struggled with gaining access to capital through traditional means. More minorities and lower net worth individuals will be able to get in on investments that can drive more wealth generation to their communities.
“It is certainly a game changer,” says investment advisor William MIchael Cunningham, owner of Washington, DC-based Creative Investment Research Inc., an investment research and consulting firm, and the founder of BlackCrowdFunding.net, a social funding and project listing website. “Despite the fact that the SEC has no African American Commissioners (and few staff), blacks should be among the primary beneficiaries of this new law,” he says. “We have strong networks, so fraud should not be an issue. We are also familiar with “passing the hat” in Church, we have great business skill and ideas that just need a little money to blossom, and we have the technical skills required,” adds Cunningham, who is the author of The JOBS Act: Crowdfunding for Small Businesses and Startups
“One of our issues will be the institutional arrangements, monetary, physical and mental, that keep us chained to our own perception of inferiority,” Cunningham says. “Certain groups, black banks, white banks, old line activist groups, will try to stand in the way of our ability to use crowdfunding to ignite progress.”
According to Cunningham, SEC Officials have no intention of using Title VII of the Act, which requires the SEC to reach out to women and minority owned companies to inform them about these new fundraising opportunities. “This may be due to the lack of diversity on the SEC staff,” he says.
He further notes that the SEC voted to create a new SEC Act exemption. The amount of money you can raise and the amount of money you can invest is limited. SEC Staff Members John Ramsey and Sebastian Gomez were two of the authors of this exemption. Ramsey stated the new rule requires crowdfunding intermediaries to register with the SEC and the Financial Industry Regulation Authority (FINRA). The new rules create an entirely new type of business financing firm: a Funding Portal (FP). Portals bring investors, companies together. FINRA will issue a regulatory notice on FPs.
SEC Staff Member Lela Bond stated that the proposed rules exclude foreign companies, investment companies, companies with no business plan, and companies looking to raise money for the purpose of financing a merger or acquisition from using US-based equity crowdfunding. The proposed rules also require intermediaries to provide investor education, collect information about investor income and net worth, and abide by anti money laundering laws.