The US Jumpstart Our Business Startups Act (JOBS Act) seeks to increase the flow of investor capital to so-called emerging growth companies (EGCs) by providing them exemptions from many of the requirements for listed companies, including governance structures, disclosure requirements, and shareholder-rights provisions. These exemptions seek to create a more hospitable environment for EGCs by reducing regulatory costs and disclosures and by giving owners and insiders a freer hand at making changes to governance structures.
Crowdfunding Regulations Under the SEC & JOBS Act
The SEC has adopted a number of regulations to help facilitate the growth of EGCs, as mandated by the JOBS Act.
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. The SEC adopted Regulation Crowdfunding in 2015, which allows permits individuals to invest in securities-based transactions subject to certain investment limits. An issuer is limited to the amount of money it can raise and has to meet certain disclosure requirements about their business and securities offering. Regulation Crowdfunding also governs the activities of broker-dealers and funding portals that are involved in the crowdfunding transactions.
The rapid growth in low-documentation, start-up-phase financing of small projects and companies has created a need to ensure that the interests of small companies seeking capital are appropriately balanced against investment protection and the needs of investors to obtain information vital for their investment decisions.
The SEC also adopted amendments to Regulation A to allow smaller companies to offer and sell up to $50 million in securities during a 12-month period without having to comply with all requirements applicable to registered securities. Two tiers of offerings (up to $20 million, and up to $50 million) ae subject to differing disclosure and reporting requirements.
Amendments to Rule 147 allows issuers to engage in intrastate offers and sales of securities without having to federally register them.
Individual state regulations often require registration of offerings of a specified amount. The SEC also has adopted a rule that allows issuers to use mechanisms such as email to advertise offerings to state residents (even if the advertising is received by residents of other states), as long as the sale is made only to those who reside within the state.
CFA Institute Viewpoint
Although beneficial to issuers, changes adopted under the JOBS Act mandate increase the risks for those who invest in them. Without adequate information and without audited financial statements, investors are unsure of the veracity of claims by insiders regarding performance and financial conditions. Moreover, additional risks are created through looser governance structures that do not protect external investors against fraudulent financial reporting and dilution of their share values, among other risks.
CFA Institute supports efforts to enhance small-company access to the capital markets for equity and debt funding. We believe this goal should be balanced with the transparency needs of investors. CFA Institute believes that the following safeguards are needed to balance the capital needs of small companies and the transparency and protections investors deserve:
- Integrity of platforms’ operations; appropriate regulatory structures and guidance in place;
- Transparency by issuers and platforms; presubscription and ongoing disclosures and warnings;
- Investor access & appropriateness; limiting access for and educating unsophisticated investors;
- Due diligence and safeguards; reviews of issuers by offering platforms and managing conflicts;
- Small- and medium-size enterprise (SME) access and focus; limit participation to SMEs and EGCs;
- Corporate governance protections; platforms do background checks on issuing principals.