The Securities and Exchange Commission hosted its annual Small Business Capital Formation forum last Thursday. Crowdfunding under Title II and Title III of the JOBS Act was top of mind. The crowdfunding industry was hoping for a substantive update – the SEC is well beyond congressionally mandated deadlines for promulgating Title II rules – but Chairman, Mary Shapiro, offered no additional visibility into the SEC’s rule-making progress.
Title II of the JOBS Act lifts the ban on general solicitation and advertising of security offerings, enabling companies to efficiently solicit and raise capital from a large (or small) number of accredited investors online. Effectively, Title II will kickstart crowdfunding from accredited investors (high net-worth individuals). While the SEC is well passed the Congressionally mandated deadline of July for Title II, many in the industry are cautiously optimistic that we’ll see action by the end of this year, or early next. Title III of the JOBS Act (The CROWDFUND Act) on the other hand, which creates a democratized private capital marketplace by allowing investors of all economic classes to participate, isn’t looking so good. Many, including myself, believe that implementation will be delayed until late 2013.
The SEC’s views have been publicly voiced in the abstract – heavy in concern, but light in rationale. Abstract questions are important to ask, but we must recognize when direct or tangential answers already exist. I urge the SEC to take a step back from the conceptual, and step forward with a more applied, data-driven approach. We have the data, let’s use it. I compiled a database of crowdfunding raises from nearly every investment crowdfunding platform in the world and published it. More than $215 million raised, 1,300+ companies funded, and not a single incidence of fraud. The data can not be refuted: crowdfunding works. The question is not if, but how.
A Validated Model: ASSOB
$130 million of this total has been democratically raised by a single platform, the Australian Small Scale Offerings Board (ASSOB). Since 2007: 132 companies funded; 83% still in operation; 39% of funds raised from ‘Sophisticated Investors’, 61% raised from ‘Retail Investors’; not a single incidence of fraud. It’s beautiful. Participatory, equal opportunity, and it works.
It works because ASSOB has been given absolute regulatory visibility, affording them the freedom to innovate. And innovate they have. ASSOB has a created a highly involved model that introduces smart constraints to manage businesses through the fundraising process. One such constraint being the requirement that all businesses hire a “Sponsor,” a pre-qualified individual who intimately shephards the business through the complexities of a private equity placement. The cost of a sponsor averages $5,000.
Like all constraints, this creates systematic consequences. It causes friction, increases costs, and, undoubtedly, reduces deal-flow. However, it also ensures that (i) businesses are diligent before deciding to apply, (ii) offering documents are high-fidelity, prepared compliantly, and (iii) businesses aren’t overly distracted from running their business.
While ASSOB is one model that works, it is certainly not the only one. And this is critical: So long as our regulators provide absolute clarity – and the freedom to innovate, through iterative failure and success – we will see a great number of creative models successfully emerge, some more constrained, some more liberated, some high-risk, some low-risk, and everything in between. Coupling the immense efficiencies of the internet with private sector innovation, they will meaningfully serve a profound diversity of businesses, across every imaginable hue of investor class and intent.
This is what is at stake. Our elected leaders passed the JOBS Act with overwhelming bi-partisan support. The intent of Title III was clear: to create a participatory private capital market that is open, transparent, and accessible to all. Yet the SEC has missed every deadline given to them, and chosen to withhold disclosure of their progress. This lack of transparency is unacceptable, and it’s incumbent upon us to hold them accountable. Because, at the end of the day, our vote has already been cast with the passage of the JOBS Act. This isn’t their choice: The right to accept risk and invest in the companies we believe in is ours.