Legal
crowdfunding

Online Angel Funding Model Greenlighted by SEC?

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While rulemaking to implement the equity crowdfunding mandates of the JOBS Act remains in limbo awaiting the seating of a new SEC chair, the agency moved last week to approve an online angel funding group’s compensation model that would be exempt from some of the JOBS Act’s more costly and vexing requirements for crowdfunding platforms. The approval of FundersClub’s “carried interest” model  paves the way for angel platforms to begin raising funds from accredited crowd investors immediately. In a No-Action letter published last week the SEC said that FundersClub’s proposed compensation model, which relies solely on carried interest in its funded companies, qualified for the angel platform exemption from registration, general solicitation and broker-dealer requirements for Title II and III equity crowdfunding platforms in the JOBS Act’s Section 201(c). The SEC’s move is significant because it allows online funding platforms that restrict their investors to bona fide accredited investors and only take compensation from the investment gains of stakes held in the platform’s portfolio companies to begin fundraising immediately without further rulemaking from the agency. The rulemaking to implement Title II-style equity crowdfunding has been stalled for seven months after the SEC released a proposed rule addressing the mandated repeal of the general solicitation rule for restricted securities which was widely criticized as opening the flood gates to fraud. Former SEC chair Mary Shapiro left the agency in December without finalizing the repeal of the solicitation rule, reportedly fearing a repeal would ruin her legacy as a securities regulator.

Legal
crowdfunding

Regulators Sifting Through Crowd of Comments

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Considering the number of issues competing for time at the Securities and Exchange Commission – from poring over comments on its recent general solicitation proposal to implementing a raft of Dodd-Frank provisions – it is widely believed that the regulator will push back the end-of-the-year deadline to propose rules for equity crowdfunding. Nevertheless, crowdfunding proponents and skeptics alike accelerated their posting comments at the commission’s website ahead of an October 5 deadline, hoping to convince staffers to see things their way. Similarly, market participants interested in the funding portal end of the business raced to file comments to the Financial Industry Regulatory Authority before an August 31 deadline. While the SEC is simply asking for ideas concerning the general rules and implementation of equity crowdfunding and portals – or Title III under the act – FINRA is in the position to oversee the registration and regulation of the funding intermediaries. In July it issued a release seeking opinions on portal supervision, advertising, fraud and other issues.

Markets

Real Estate Capital Redefined

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As potential crowdfunders wait for the Securities and Exchange Commission to release rules regarding security sales to the general public next year, one company is already well on its way to using the process to finance a roughly $1.3 million property redevelopment at 1351 H Street NE in Washington, D.C. And the developers suggest that crowdfunding has the potential to substantially change the way that real estate sponsors raise money in the future, especially for neighborhood projects. “This is so diametrically opposed to how real estate is financed today,” said Benjamin Miller, who with his brother is leading the development. "Most people don’t have access to this type of investment, but investing in a nearby building makes a lot more sense to me than in a gold mine in South Africa"

The developers in June began selling Class B units for $100 each in Fundrise 1351 H Street, the owner of a 5,380 sq. ft. two-story building at the site.

Legal
crowdfunding

Muddy Solicitation Proposal Takes Wind Out of Crowdfunders

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Judging by the glowing proclamations that the JOBS Act would revolutionize small business capital formation, equity crowdfunding proponents were one of the most eager constituencies waiting for the Securities and Exchange Commission to write rules lifting the ban on general solicitation when conducting Rule 506 offerings under Regulation D.

The commission’s blessing to advertise the sale of unregistered securities to accredited investors was considered to be the first step in a two-step process. The next step, which could occur as early as January, is supposed to open unregistered securities sales to non-accredited investors. For the most part, however, the commission delivered a gut kick to crowdfunding aspirations when in late August it issued a proposal rather than final rules – further delaying rulemaking that was supposed to be completed in July – and then decided to put the onus on issuers to determine whether an investor is in fact accredited. The vague explanation on how issuers should conduct their investigations added some sting, too. “If you want to get capital flowing to job creators, if you’re trying to solve the problem of the funding void that exists for entrepreneurs and small businesses, then undefined bureaucracy doesn’t help,” said Sherwood Neiss, a principal of Miami-based Crowdfund Capital Advisors, a strategy and technology consulting group that works with crowdfunding platforms and investors.