Magazine article American Banker

SEC Issues Long-Awaited Crowdfunding Rules

Magazine article American Banker

SEC Issues Long-Awaited Crowdfunding Rules

Article excerpt

Byline: Kevin Wack

Starting in late January, small businesses seeking funds to hire more workers or expand operations will have a new option: crowdfunding.

New regulations approved by the Securities and Exchange Commission on Friday will permit business owners to raise up to $1 million per year from everyday Americans through online portals.

The rules were seen as a victory for entrepreneurs, many of whom have been clamoring for final rules on crowdfunding at a time when they've struggled to obtain conventional financing. They also create new investing opportunities for middle-class Americans who generally don't have much chance to invest in new or growing companies.

Sen. Mark Warner, a Virginia Democrat who has been a champion of crowdfunding, said that the long-anticipated ruling "will allow more smaller investors to participate in America's entrepreneurial economy.

"Crowdfunding promises to democratize startup activity and entrepreneurial innovation across the country, and offers exciting, even game-changing opportunities for rural areas, which often have limited access to capital," he said in a statement.

The new regulations would seem to impose fewer burdens on small-business owners than the agency's 2013 draft rules contemplated. Still, it remains to be seen if crowdfunding will emerge as a viable source of financing for small businesses.

One problem is that many small businesses looking to raise either debt or equity online have little in the way of money or sophistication, and that can be a problem when trying to navigate complex regulations, said Viktoria Krane, the chief executive officer of Lendoor, a crowdfunding site.

"Not necessarily the next Facebook, but the next local auto mechanic," she said, describing the typical small business that turns to crowdfunding.

[Coming next week: Marketplace Lending + Investing. Hear how participants in this fast-growth niche are using data and technology to propel lending into the 21st century.]

For such companies, which may be seeking to raise $20,000 to $50,000 in startup capital, the costs of complying with the SEC's regulations may not make financial sense, she added.

Krane founded New York-based Lendoor in 2013 with plans to become a national crowdfunding portal operating according to the SEC's rules. But as the agency dragged its feet, Lendoor changed its strategy and started operating in Texas, which had adopted its own crowdfunding rules.

Now the company is switching gears again, repositioning itself as a place for entrepreneurs to raise money from friends, relatives and other people in their social networks.

Because those fundraising pitches will not be open to the general public, the company will not be subject to the SEC's new crowdfunding rules.

"After two years of waiting, I would have expected to be a little bit more excited," Krane said. "But my feelings are mixed."

Several other observers were more upbeat about the SEC's long-delayed action. Douglas Ellenoff, a securities lawyer with Ellenoff Grossman & Schole, said that the final rules do not require as much scrutiny of a company's financial statements as the 2013 draft would have. …

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