Since October 23 we have been in full force reviewing the proposal that the SEC submitted for public hearing over the next 90 days and the questions and challenges it brings.
The proposal is 585 pages long. The 90-day comment period is needed, and indeed the SEC may need more than 30 days to summarize the findings. That would push a vote on these proposals to April 2014. Another 70 days are needed for the Federal Register to make it into law, so June is the earliest we will see a law, if all things proceed as expected.
To recap the fundamentals, you can only invest 10% of your annual income or 5% or $2000 of that whichever is higher when you earn less than $100,000 per year, and startups can only raise $1 million per year.
1. One interesting question is whether foreign platforms can qualify under the regulation, and how the regulation will play out in relation to other SEC exemptions being used, including Regulation D 504, 505, 506 b and 506 c. The issue of how to report and account for the amount the investors are allowed to invest is important. How will the industry be monitored on this? Where will the burden lie?
2. Automating the submission of advertising and offering documents will play an important role in keeping costs down. Background checks on all owners with 20% ownership is something that both the SEC and FINRA have to streamline, as these costs in the micro cap market have been as high as $25,000, and even higher for companies. However, we are seeing great technologies out there to automate and streamline these costs.
3. Platform intermediaries are allowed to collect commissions, though the SEC has been quiet so far about the rules for broker-dealer requirements. It will be FINRA that will be able to craft its rules for its members. It still may be imperative from a strategy point for intermediaries to have broker-dealer licenses, as there are challenges to the definition of what constitutes advice under the investment act of 1940.
The SEC has given us a chance to make history. Commissioner Stein put it well as she encouraged the law for capital formation. However, she recognized that the initial Regulation D 504 was a failure, as the high number of fraud cases forced the regulations to be amended years later. We need to be careful in thinking this through to protect investors.
In layman’s terms, and as I wrote for Thomson Reuters in peHub in November 2012, these regulations can become law in June 2014 at the earliest, due to the SEC process. Even then, FINRA has to have all approvals in place or things will be further delayed.
Overall, this is a gigantic success for capital formation. It is quite possible that crowdfunding for equity will become a reality by summer 2014.
David Drake, CEO LDJ Capital, David@LDJCapital.com
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft, a global event-driven financial media company helping firms and funds advertise for investors. He is running the Real Estate Investing and Leading Crowdfunding Conference in NYC on Nov 14, 2013. Listen to him speak on above and other issues together with Keynote Barry Sternlicht of Starwood Capital. Details of the event can be found at: https://thesoholoft-real-estate-investing-newyork.eventbrite.com/.
Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from David Drake. This work reflects the law at the time of writing.