Today is being hailed by some as a major milestone in crowdfunding with the implementation of new SEC regulations. As Crowdfunding Insider notes (“Preparing for (Regulation) D-Day”):
For the first time since the enactment of federal legislation in 1933, companies will be allowed to publicly solicit investors and advertise the sale of securities without registering the offering with either the SEC or any state if certain requirements are met – most notably, that the company have appropriate procedures in place to verify that all investors who purchase the securities are “accredited investors.”
This one of the steps in implementing the rules concerning crowdfunding in the JOBS (Jumpstart Our Business Start-ups) Act of 2012. Last week, another provision of the JOBS Act took center stage when Twitter announce (via a Tweet of course) that is was preparing an IPO using the new provisions under the JOBS Act. Those provisions allow certain companies to submit a confidential S-1 filing with the SEC. The information in the filing will eventually be made public before the actual IPO. But the provision gives companies gives companies a chance to vet their offering before the details are made pubic to all. They may change it or withdraw the offering completely without revealing sensitive financial information.
Both of these actions highlight the coming tests for the JOBS Act. In a piece (from last month) in Forbes (“Five Things the General Public Should Know About Crowdfunding”), Cameron Cushman from the Kauffman Foundation lays out some key truths. Three of those truths involve what can go wrong: people will lose money; there will be fraud; and there will be big successes and big failures. As a New York Times piece last Saturday (“With a Tweet, Twitter Starts a Debate“) notes not everyone is happy with new IPO process. Big institutional investors are reportedly concerned about other provisions that loosen audit requirements. Even if the Twitter IPO is a huge success (from both the company and investors point of view), there are likely to be at least a few that resemble Facebook or Groupon.
The test will be how the system handles the inevitable problems. As I’ve said before, the JOBS Act and crowdfunding represents a tremendous opportunity for funding entrepreneurs. But there will be failures and there will be fraud. Already there is an issue of so-called “blank check” companies attempting to use the law to circumvent standard regulations (see earlier posting). In an earlier posting, I made the point that the JOBS Act needs to be seen as a regulatory experiment. How the experiment is monitored and modified will determine the JOBS Act’s ultimate success or failure.