The U.S. Securities and Exchange Commission is forming a small-business committee to review securities offering rules that would make it easier for small private firms to raise capital but might also make it easier for fraudsters to operate, according to a series of recent Wall Street Journal articles (“SEC to Form Small-Business Committee”, “‘Startup America’ Embraces Crowd-funding,” and “SEC Boots Up for Internet Age,” by Jean Eaglesham and Jessica Holzer).
“Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and companies seeking access to capital should not be burdened by unnecessary or superfluous regulations,” SEC Chief Mary Schapiro was quoted as saying in testimony before a Congressional committee, adding that the SEC wants to “reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection.”
With credit from traditional lenders still tight, small-business owners have turned to alternative sources of money. IndieGoGo is an example. Its web site provides a platform that brings together people seeking money to fund a “campaign” or “passion” and people who may wish to “contribute” to money to a story that sparks their interest. There is no “investment” in debt or equity. Contributors essentially purchase “perks” – $8 for a coffee mug, $30 for a CD package, et cetera ? offered by the campaign. IndieGoGo tells contributors they can contribute more than the price of the perks if they wish, however.
IndieGoGo reportedly has more than 24,000 campaigns seeking funds on its site.
According to Ms. Schapiro, the SEC has been “discussing crowd-funding and possible regulatory approaches” with small-business groups and state regulators with a view to allowing small amounts of equity investments to be sold online to unaccredited investors.
“We look forward to helping the next wave of entrepreneurs to find the funding to support their launch and sustain their growth,” IndieGoGo co-founder Slava Rubin was quoted as saying.
A petition calling for relaxing securities laws for crowd-funding share issues of up to $100,000 has been proposed.
Ms. Shapiro stressed that any waiver of securities laws should not enable fraud operators. She recalled that, in 1992, the SEC permitted offerings of up to $1 million to be made to unaccredited investors without the normal disclosure requirements. But that was reversed in 1999, “in light of investor-protection concerns about fraud,” Ms. Schapiro said.
“In developing any potential exemption for crowd-funding, it will be important to consider this [1990s] experience and build in investor protections to avoid the issues created under the prior exemption,” Ms. Schapiro was quoted as saying.
However, many are concerned that the proposal for relaxing securities laws for crowd-funding would allow companies that are “more hoopla than they are substance” to raise capital based on limited disclosures. “A whole lot of investors could be harmed.”
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