Launcht CEO, Freeman White, was in Washington DC on June 18th as part of a delegation from CFIRA to discuss equity crowdfunding rule-making with the SEC, FINRA, and Congress. The general tenor of the meetings were very hospitable. The SEC, FINRA, and Congress are all interested in getting this right and we commend them for their continued and diligent efforts. The SEC and FINRA are both still deliberating, mostly separately at this point, and so none of our observations from the 18th are conclusive or definitive. The SEC seemed further along in their deliberations than FINRA, based on the depth of questions asked and topics covered; thus this post mostly covers indications received from the SEC. Future posts will discuss FINRA’s deliberations.
CFIRA went into the SEC meetings seeking guidance or general opinions on the following:
- Unaccredited investor verification standards for checking annual income and aggregate annual crowdfunded investment amounts.
- The ability for intermediaries to have a criteria-based screen for which companies can conduct offerings on their platforms
- Whether intermediaries can offer advice to the companies issuing stock on their platforms under the equity crowdfunding provisions.
- How intermediaries can advertise their platforms vs. advertise investments on their platforms vs. offer advice about the investments on their platforms
- Whether regulators see the law also applying to debt-based securities.
- How regulators would treat concurrent offerings under both crowdfunding and Reg. D
CFIRA advocated strongly for allowing unaccredited investors to declare their income and aggregate equity crowdfunding activity. However, it sounded like the SEC was leaning towards the use of a central database for verifying aggregate annual investment amounts instead of taking the investor’s word for it. In an interesting move, it was suggested that the optional use of such a database by the intermediaries might earn them safe harbor protections regarding that aspect of the law.
Understandably, CFIRA advocated for letting the intermediaries decide what types of businesses could list offerings on their platforms. The SEC seemed to be ok with this so long as it didn’t start looking like investment advice. Specifically, the more objective and transparent the criteria, the better. Both sides saw how these criteria could help prevent fraud and build a stronger market.
CFIRA raised the point that intermediaries would be very commonly approached by companies seeking advice about how to set up and conduct their offering. Thus CFIRA advocated for allowing the intermediaries to provide the type of advice that would ensure the offering is well conceived and appropriate for the company. As this topic is not particularly covered in the JOBS Act, the SEC indicated it was not eager to regulate this topic in the first place.
We engaged the SEC in a lengthy discussion of the finer points distinguishing advertising the platform from providing investment advice. CFIRA’s position is that the intermediaries should be able to advertise their platforms and highlight specific companies conducting offerings on their platforms. Intermediaries would like to use the current model of featuring listings on the home page of a crowdfunding platform. The SEC was not wild about this. It sounds like they picture the intermediaries operating more like a retail investment platform for the public capital markets (think Fidelity’s investment/trading platform), where investors search for, research, and invest in companies. In this model the platform itself doesn’t really promote any one company, just the ability to invest. Specifically, the SEC was more in favor of user-driven search and filter mechanisms than behavioral based analysis to serve them investment opportunities that might interest them. The more individualized the experience might be on the platform, the more the SEC got concerned.
While it was not definitive, the SEC indicated that its reading of the crowdfunding part of the JOBS Act did not extend to debt-based securities. They seemed to take the stance that the intent of the crowdfunding provisions contemplated equity ownership of companies, not loans to companies. This is contrary to unofficial guidance given from some in the Senate during the legislative cycle that produced the act. As a few folks in CFIRA are interested in offering debt-based peer-to-peer loans through their platforms, this raised a need for added clarity.
We stated our interest in making sure that a company could simultaneously raise seed funding under a crowdfunded offering and a Reg. D offering to Angel Investors. The SEC pointed to concerns they had about the integration between these two types of funding. Their most pointed concern was regarding the new Reg. D general solicitation provisions also in the JOBS Act. They were very concerned about a hypothetical scenario where a company’s Reg D. offering could be advertised publicly and drive viewers to a site where the individual could either invest through the Reg. D offering or the equity crowdfunding offering, depending on whether they were an accredited investor or not. This would effectively allow a company to publicly advertise their equity crowdfunding offering, which is not allowed in the crowdfunding part of the JOBS Act.
While some of this points to equity crowdfunding being more difficult than we would like, more importantly it appears the SEC is acting in good faith to try and get this right. To that end, CFIRA is organizing a summit for mid-July in Washington to bring together folks from the SEC, FINRA, and Congress to talk through the rulemaking process together. Our conversations with our contacts in the Senate highlighted the need to emphasize the legislative history that led to the crowdfunding elements of the JOBS Act. We’re hoping that bringing this perspective front and center to the SEC may help develop lighter weight rules that balance investor protection with the development of a robust crowdfunding marketplace.