Yesterday, the Securities and Exchange Commission announced it is easing some Regulation Crowdfunding rules to help small companies to raise capital more quickly.
The changes will apply to offerings launched between the effective date of the temporary rules and Aug. 31, 2020.
In order to take advantage of these “temporary rules”, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief.
The temporary rules respond to feedback the SEC has received “about the difficulties these companies may face in conducting an offering within a time frame that meets pressing capital needs, while continuing to provide appropriate protections for investors,” SEC Chairman Jay Clayton said.
Under the changes, financial statements may be initially omitted from the offering statement, but investment commitments won’t be accepted until after financial statements are provided in the offering statement or an amended offering statement.
Sales will be permitted as soon as the issuer receives binding investment commitments covering the target offering amount, instead of the previous requirement of at least 21 days after the offering statement is available.
Early closing is permitted in certain cases under the temporary rules.
We’ve watched the crowdfunding market closely and still believe it will continue to emerge as a source of capital for early stage and small businesses. The difficulties of the offerings are still more complex than many businesses can accommodate and can be seen in the slow adoption curve since being signed into law under the Title III JOBS Act in 2012. The costs to run a crowdfunding effort are also very expensive relative to other forms of capital formation.
I welcome the intent to reform early stage capital formation – it was one of my main points when speaking on Capitol Hill. How can we allow people to buy scratch off lottery tickets with no ID and cash? But the common person is highly regulated out of wealth creation opportunities.
But at the same time, this welcomed action leaves me with even more questions.
- The rule change begs to the question, what about Covid-19 (or any other crisis) reduces the risks of any given offering so as to relax the requirements?
- Or even moreso, how does the relaxation of the current rules demonstrate the status quo of iron fisted regulation of capital formation, and status quo of a significant barrier to capital formation and funding of innovation?
Mostly working against laws established in a business environment 100 years ago, the SEC is ripe for innovation itself.