take stock in the companies they list, as compensation for their services, and by another rule that waives the requirement for audited financial reports for first-time issuers of crowdfunded securities raising $500,000 or more.
But Vincent Bradley, CEO of Santa Monica, CA-based FlashFunders, says the regulations will prevent funding portals from operating at a larger scale, and will limit the number of companies that can use the equity crowdfunding mechanism to access capital.
Bradley says the expense of vetting companies and their officers and directors, as well as other obligations placed on portals, will force them to focus only on companies that seem to have a very high chance of success. That could leave out startups that the “crowd” might have wanted to back, he says.
“It doesn’t mean there can’t be a successful platform,” Bradley says. “But it goes from ‘the market picks the winners’ to ‘the platform picks the winners.’ Very few entrepreneurs will benefit.”
The market is already surfacing new companies that claim they can help solve that problem.
Toronto, Canada-based KoreConX just announced an online service to help portals conduct their due diligence-related tasks efficiently, and help companies keep track of their new crowds of shareholders.
Many details of the SEC’s final rule–a document that tops 600 pages—still need to be better understood and interpreted. Lawyers are still poring over the tome to answer their clients’ questions.
Some established portals, like FlashFunders, have the option to walk away from Title III equity crowdfunding. They’ve already been taking advantage of other new SEC rules—many authorized by the JOBS Act—to use the Internet to attract a new crowd of investors that never would have gotten in on the early stage financing rounds for startups because they don’t personally know a venture firm partner or a well-connected angel investor. The most widely used of these Web-based fundraising mechanisms, however, are restricted to wealthy investors. (Read more about these alternative fundraising methods here.)
Bradley says he may stick with his existing business model—helping companies raise capital under a new SEC rule called Regulation D 506 (c). “What we’re doing is working,” he says. But Bradley says he’ll use Title III equity crowdfunding as well, if it’s feasible.
The SEC regulations don’t forbid portals—or companies—from working with more than one fundraising method at the same time, though they need to step carefully to make sure they’re in compliance with the regulations for each mechanism.
Chaturvedi, whose Propel(x) platform site now helps companies raise money only from wealthy investors, says she finds the SEC’s requirements for equity crowdfunding portals acceptable.
“I have great optimism about this,” Chaturvedi says. However, Propel(x) will run through an economic analysis before deciding whether to work under the Title III equity crowdfunding model.
Reading the tea leaves on Indiegogo’s website, it looks like the San Francisco company is not only considering the use of Title III crowdfunding, under which companies can raise no more than $1 million in a 12-month period, but is also looking at another new SEC rule called Regulation A+, which allows companies to raise as much as $50 million in what’s been called a “mini-IPO.” The regulatory burdens and expense are higher for Regulation A+, which may make it more suitable for companies that have already gained some traction. But it does allow non-wealthy people to invest.
Ron Miller, CEO of Santa Monica, CA-based StartEngine, says the Title III regulations aren’t ideal from a portal’s point of view. StartEngine already helps companies sell securities under Regulation A+. But Miller says his company will also jump into Title III equity crowdfunding.
“Our plan is to have Title III offerings on the very day they become authorized,” Miller says, estimating that date as May 16, 2016. “Opportunities like this are literally game changers.”
