Missed Opportunities to Raise Capital Through “crowdfunding” as Envisioned by the JOBS Act (by Neal L. Wolkoff, OTC Markets)
Congress and President Obama shared a moment of harmony in April 2012 when they passed and signed into law the Jumpstart Our Business Startups (JOBS) Act to help smaller corporations – the largest creator of new jobs – raise capital and become public companies simply and efficiently using 21st century online tools. Title IV of the JOBS Act gave small companies the opportunity to use online offerings to raise up to $50 million from individual investors, a significant increase from the previous limit of $5 million. While the JOBS Act speaks in broad strokes (leaving many details for the SEC to implement), its intent is clear: ease the path for small businesses to create jobs and stimulate the American economy.
In March 2015, the SEC published the rules for implementing Title IV, which became known as Regulation A+. The new process for raising capital was attuned to fulfilling the pro-growth intent of the JOBS Act while also protecting investors through disclosure, public reporting and other sensible requirements.
Unfortunately, as implemented, thousands of SEC reporting companies have been excluded from accessing capital under Regulation A+. An otherwise fine process has missed the opportunity to be truly meaningful for small company growth, and also denies many investors the tangible benefits put into place under Regulation A+. Pro-business/pro-investor capital raising rules thus miss being the win/win they could have been by keeping a key component of the nation’s small company job creating engine from the dramatic benefits this legislation could offer them. Fully compliant, smaller reporting companies must still bear the cost and complexity of the prior capital raising process, and investors in these companies lose out on the many solid protections that Regulation A+ would offer them if they were eligible.
Since June 2015, approximately 100 companies have publicly filed Regulation A+ offering statements with the SEC. One illustrative success story – startup Elio Motors Inc. – raised nearly $17 million under Regulation A+ and is now publicly trading on OTCQX, the top market tier of the U.S. over-the-counter (OTC) markets. Many more success stories would be in the offing if SEC small cap reporting companies were eligible to receive the capital raising benefits and protections for their shareholders of Regulation A+.
I acknowledge the doubters who are concerned that expanding A+ to cover reporting companies could increase opportunities for investor harm, particularly since most shareholders in small cap companies are individuals and not large institutions. The reality, however, is that Regulation A+, includes significant features to boost investor protections, particularly contrasted to current capital raising procedures, while the targeted category of reporting companies already meets the SEC’s high standards for disclosure.
Online securities offerings under Regulation A+ provide significant investor benefits over traditional opaque, offline offering processes, including a permanent record, or audit trail, of disclosures made to potential investors. Contrast the transparency and permanence of online statements with the potentially risk obscuring telephone call offering a private placement investment. Transparent, public disclosures benefit investors, regulators, compliance officers and the press, all of whom can now make more informed decisions when evaluating and overseeing these offerings.
Companies with a strong consumer focus and an established customer base could use Regulation A+ to tap existing customers for investment, a group already possessing a level of familiarity and insight about the company. This pool of capital, which could be reached through transparent online marketing, is denied to thousands of companies and their investors because of the ineligibility of SEC reporting companies. Regulation A+ could be the modern version of the local capital raising method small community banks have used for decades: selling shares to existing clients. As any community bank will tell you, your best shareholder is an existing customer.
Allowing small cap SEC reporting companies to access capital from new investors under Regulation A+ would improve liquidity of current investors by drawing additional investors to the shareholder base. Improved liquidity benefits investors, while illiquid issues often frustrate them and inflict added cost.
In short, the rules need to be changed. Transparent, public, online capital raising better serves small companies, investors and regulators, and provides a path to improving the quality of the small cap secondary markets. Granting SEC reporting companies, already highly regulated and compliant, the ability to utilize the important JOBS Act legislation would help bring about the benefits to the economy that Congress and the President sought while maintaining high standards of investor protection.
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