Crowdfunding has been growing in popularity over the years. The Securities Exchange Commission (SEC) has taken notice and in partnership with New York University hosted an open dialogue on February 28th, 2017 to discuss challenges, market research, opportunities, and the effects of securities-based crowdfunding on market participants.
The SEC's Division of Economic and Risk Analysis partnered with NYU's Salomon Center for the Study of Financial Institutions and working together they were able to bring regulators, academics, and practitioners from all over the world to participate in the landmark event. The presentations and discussions that were shared during the event were mainly about how investors could be protected while at the same time capital formation could be facilitated and encouraged.
The acting chairman of the SEC Michael Piwowar seemed excited about the benefits of the event and was quoted saying, "We are excited to collaborate with NYU in this event focused on new sources of capital formation, and designed to bring together academics, industry participants, and the SEC."
An essential part of the Jumpstart Our Business Startups Act (JOBS Act), Regulation Crowdfunding, became effective on May 16th, 2016, allowing non-accredited retail investors to purchase unregistered securities of small private companies. Regulation Crowdfunding also establishes a new type of intermediary for these transactions known as the funding portal that brings buyers and sellers together online. In a world where crowdfunding has generally been limited to rewards or donation based campaigns, Regulation Crowdfunding is a game changer.
Leading to up to the joint crowdfunding symposium, the SEC reported that since the passage of Regulation Crowdfunding rules, 21 funding portals have been established online. Through these funding portals, over 160 different deals had been initiated, and of those, 33 of them have completed their fundraising goals. There has been roughly $10 million dollars worth of new capital that has been raised under Regulation Crowdfunding since it became effective.
While, those numbers may seem small compared to other capital raised in private and public markets, but these numbers are just the very beginning of a whole new way of funding. In most cases the companies and entities that are engaging in crowdfunding activities would not have more traditional access to capital. This is a very important aspect of Regulation Crowdfunding. The JOBS act was passed back in 2012 with the intention of creating and fostering new sources of capital for entrepreneurs and small businesses that are most in need of financing.
Crowdfunding is a good, creative, alternative way to finance a small-business startup. However, while the idea is great and opens more doors for more people with good ideas, crowdfunding presents a bit of a challenge as well. An entirely new regulatory framework had to be developed with the intention of fostering capital formation for entrepreneurs while also ensuring that investors would and could be protected as well. Without protections for investors, there is little chance that crowdfunding will ultimately succeed as a funding method for these new businesses. As a result, the lawmakers, and the SEC have been very careful about ensuring protection while also fostering growth.
Crowdfunding is more than just a great way for small businesses to get funding for their projects. Crowdfunding also gives small investors the ability to get behind good ideas at an earlier stage than they ever had access to before. Plus, since they are exposed to these ideas at earlier stages, they can share information about projects, ideas, causes, etc and fund the campaigns that look best to them and the rest of the collective wisdom of the crowd. Crowdfunding offers a lot of exciting possibilities for investors and businesses alike.
The panel dialogue hosted by the SEC on February 28th, 2017 covered the economic rationale and legality, capital formation and investor protections, and the empirical evidence and data related to crowdfunding. A recorded webcast of the symposium is available at https://www.sec.gov/dera/announcement/dera_event-022817_securities-crowdfunding-in-the-us.html.