U.S. makes a move on crowdfunding

Despite the objection of state regulators, crowdfunding will soon be coming to U.S. securities markets, thanks to a bill designed to boost the flailing U.S. economic recovery.

This past spring, U.S. legislators passed the Jumpstart Our Business Startups Act (a.k.a. the JOBS Act), which requires the U.S. Securities and Exchange Commission (SEC) to develop rules to implement a new crowdfunding exemption by the end of this year.

Under the exemption, new issuers will be able to raise up to US$1 million from investors in a 12-month period without registering. Individual investors will be subject to investment limits of between US$2,000 and US$100,000, depending on their financial circumstances.

The crowdfunding portals that aim to facilitate the raising of this capital will have to register with the SEC as brokers or portals, as well as with the Financial Industry Regulatory Authority. They will also be required to follow some rules designed to prevent fraud and manipulation and to protect investor privacy.

Approval for the new exemption came in spite of vocal opposition from state securities regulators, which warned that crowdfunding could represent a serious threat to investor protection. Indeed, the North American Securities Administrators Association (NASAA), which represents both U.S. state and Canada’s provincial regulators, lists crowdfunding as its top new threat to investors and has issued alerts warning both investors and prospective issuers about the dangers.

In particular, NASAA warns investors about: the high failure rate of startups; the risk of fraud; the lack of disclosure; the illiquidity of the investments; and that without regulatory oversight of these offerings, investors’ only recourse may be to the courts when things go wrong with their investments.

The NASAA also warns issuers: about dealing with unscrupulous brokers and portals: they still face disclosure obligations; crowdfunding may be more expensive than other capital-raising methods; and that having hundreds of small shareholders may distract management and deter more traditional venture-capital investors.