keep track of the total amounts invested by each person of ordinary means, and who will enforce the limits. Conceivably, a small investor could make bets on multiple company offerings, on multiple online fundraising platforms, he says.
“Maybe there needs to be a common clearinghouse that every offering has to go through,” Bradley says.
Another question is—what happens when an investor wants to sell shares issued under one of the new SEC regulations, such as Regulation A+ or equity crowdfunding? Will they be traded on securities marketplaces, and could non-wealthy investors buy them?
Liquidity
Advocates of the new fundraising models have pointed out that young private companies will find it easier to sell their securities offerings if their investors can in turn sell these assets to others. Some online fundraising platforms such as DreamFunded are interested in facilitating such trades.
Market exchanges could give non-accredited investors another way to invest in early-stage companies if they haven’t participated in primary offerings. But these shares could be risky bets if trading volumes are low, and if there’s too little financial information on which to base investment decisions, the North American Securities Administrators Association has warned.
Under existing SEC rules, shares issued under Regulation A+ can be traded immediately, and trading exchanges are already preparing to handle these secondary offerings.
The OTC Markets Group, based in New York, has issued guidelines to pave the way, says spokesman Joe Oltmanns. This means all investors, whether wealthy or not, may soon be able to buy shares that originated as Regulation A+ securities.
The OTC Markets Group is focusing on Tier 2 offerings, where the governing SEC rules match up with its own requirements for trading on one of its marketplaces, the OTCQB Venture Marketplace, Oltmanns says. No Regulation A+ securities have traded yet, because most of the issuing companies are still in the “testing the waters” stage,” or their offerings are still awaiting approval by the SEC, he says.
Non-accredited investors might be free to risk an unlimited amount of their money to buy Regulation A+ shares in a secondary market. Oltmanns says he knows of no mechanism that could track the total amount an individual of modest means is investing in various securities traded on OTC Markets Group marketplaces.
Innovations may not end with the JOBS Act
Even though the California legislature held back from creating an in-state equity crowdfunding framework, the state’s online fundraising portals and financial institutions look likely to become a significant part of the nationwide test bed for innovations in private company sales of securities. These platforms, in California and other states, are also part of a nationwide constituency that may press for further legislation if they conclude that the prevailing regulations impede the flow of capital to young private companies. Follow-on legislation to the JOBS Act has already been proposed.
For example, U.S. Rep. Patrick McHenry (R, NC), who introduced one of six bills incorporated into the JOBS Act, has proposed a new bill that would foster the creation of secondary markets for the re-sale of securities issued by private companies. Some advocates have proposed the creation of new venture exchanges where Regulation A+ and possibly equity crowdfunding shares could be traded. These proposed exchanges would have lower listing requirements than the New York Stock Exchange and Nasdaq, and might possibly have lower requirements than the OTC marketplaces.
Though the SEC’s regulations for full equity crowdfunding have yet to come out, advocates are already proposing changes to the framework created for it under Title III of the JOBS Act. Under Title III, startups would be able to advertise their offerings on the Internet, and raise as much as $1 million within a 12-month period.
FlashFunders’ Bradley says the fundraising cap should be higher—at least $5 million. He also objects to the limit on the amount a wealthy investor can put in.
“It’s only $100,000 from each accredited investor—even if Bill Gates wants to invest more,” Bradley says.
