One Step Closer to Crowdfunding Investment

As Published in the Huffington Post Blog Business Section:

Chances are, you or someone you know has given money to a crowdfunding platform like Kickstarter or Indiegogo. It’s less likely, though, you’ve received anything too significant from your contribution. (Unless you count that signed CD your friend released two years ago.)

But after this week, we’re one step closer to making that a thing of the past.

Wednesday morning, the Securities and Exchange Commission (SEC) proposed rules for equity crowdfunding. A relatively new concept, equity crowdfunding differs from the common understanding of the term “crowdfunding.” Equity crowdfunding means that when an individual gives money to a business through an equity crowdfunding platform, the investor isn’t promised a “gift,” like a CD or signed poster in return for their donation, they’re actually given a share in the company. That’s big.

When the JOBS Act was passed in 2012, equity funding was at the forefront of many legislators’ minds. In theory, it gives the average Joe the ability to support small business and have a piece of the pie. At its core, equity funding is a very American concept.

“For the first time,” President Obama said at the bill signing in April 2012, “ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

But there’s no doubt that with all this excitement comes unknown risks. Sometimes, the “wisdom” of the crowd can be misled. And that’s where the SEC comes in.

Asked by Congress to compile a completely new set of rules for this new marketplace, the SEC’s job was to outline regulations that protect all investors, the companies, and everyone in-between. The SEC also had to fulfill the requirements already outlined under Title III of the JOBS Act. Some of the bigger provisions were that crowdfunding issuers may only raise $1 million in 12 months, and that most investors may only invest the greatest of either 5 percent of their annual salary or $2,000.

If you’ve read this far, it probably means you’re interested to learn more; I’d strongly recommend reading the JOBS Act. It’s not long. I became familiar with the JOBS Act when I was hired as the digital producer for AgFunder, a funding portal focused around Ag and Ag Tech opportunities. The only reason I have a job is thanks to the JOBS Act, as AgFunder functions under the Title II, which became fully effective September 23.

In short, AgFunder deals exclusively with accredited investors, and is not directly affected by today’s news dealing with Title III. But, it is still of professional interest because it means investor opportunity is available to even more Americans and further democratizes the investment world. It is of personal interest because I’d love to see my unemployed twenty-something friends get jobs as a result of legislation, just as I have.

“There is a great deal of excitement in the marketplace about the crowdfunding exemption,” said SEC Chairman Mary Jo White in her opening remarks during this morning’s meeting. “And I am pleased that we are in a position today to adopt a rule proposal that would, upon adoption, permit crowdfunding to begin. We want this market to thrive, in a safe manner for investors.”

Not only is this an exciting financial prospect, but it also indicates that there might be some solid (albeit late) thinking and negotiation going on in Washington. After all, when the SEC was established in 1933, it was born out of the reaction to the stock market crash of 1929, known as Black Tuesday. The SEC’s main job was to make sure investors were well informed to make smart financial decisions to avoid another collapse.

It’s presumable that today’s new crowdfunding model would be of immediate concern to the SEC — the model is essentially asking the SEC to both allow and protect many unsophisticated investors. It asks the SEC to loosen the reins and allow for capital building while still monitoring transactions. And, that’s kinda what they did. (Of course, it is also prudent to understand that given the explosion of popularity of crowdfunding platforms, this was probably bound to come. Still, thanks, SEC.)

So what’s next? The SEC will submit these proposed rules to the Federal Registry, which will presumably publish the rules within a week. Once the rules are published, a 90-day comment period begins.

The commissioners’ statements in this morning’s meeting echoed Commissioner Luis A. Aguilar’s. “I look forward to public comments,” Aguilar said. “Particularly from investors and investor advocates as to how the rules can be improved.” Commissioner Daniel M. Gallagher also cited that there are 295 questions in the proposal; that leaves a lot of room for public comment.

Now, it’s up to the average Joes, or in Obama’s words, “ordinary Americans” who are looking forward to taking advantage of this opportunity to invest to do their homework. While the SEC’s proposed rules are a start to ensuring safe investments, no matter what, the individual needs to be substantially informed when making an investment.

We can only hope that the days of rags-to-riches expectations without hard-work, misinformed house flipping practices, and unsubstantiated investments are gone. It might be time for Americans to rekindle the true American dream. That is, knowing that the combination of hard work, education, equal opportunity, and smart investment leads to financial success and security.

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