Home > Property & Casualty > All eyes on IPO activity as JOBS Act’s crowdfunding measure gets SEC approval

All eyes on IPO activity as JOBS Act’s crowdfunding measure gets SEC approval

crowdfundingOn July 10th, the SEC voted in favor of Title II of the JOBS Act (also known as the crowdfunding provision), lifting a ban on general solicitation or general advertising for securities offerings, giving small companies greater access to capital and investors. The final ruling amends Rule 506 of Regulation D of the Securities Act to permit issuers to use general solicitation to offer securities, so long as they take the reasonable steps to verify that purchasers Accredited Investors, and that all purchasers of the securities qualify as accredited investors under Rule 501. Industry experts say all companies must also complete a more comprehensive filing process with the SEC prior to doing any solicitation.

While Title II was expected to be completed within 90 days following passage of the JOBS Act in April 2012, the SEC asked for comments and feedback about the provision for over a year before finalizing the ruling. Questions remain as to whether the delay may have hurt the overall success of the JOBS Act. Last year, 55% of investment bankers said they thought the new law would jumpstart IPO activity and the market. Now, just 29% say they believe the JOBS Act has had a positive effect on market activity. Many of the comments that the SEC received about Title II came from groups opposed to the measure that feared an increase in fraudulent offerings. However, those in favor of crowdfunding point to the potential for greater capital formation and an overall boost in IPO activity. The agency posted the new rules in the Federal Register on July 24, and equity crowdfunding is expected to become exempt by late September.

The crowdfunding ruling proves especially significant for companies looking to raise investment capital within specific niche communities and groups, such as start-ups and social enterprises, consumer products, $1M or more and college alumni groups that back college entrepreneurs. Companies are also expected to eventually be allowed to promote investment offerings outside of Accredited Investor Networks and use social media sites like Facebook, Twitter and LinkedIn. However, any use of social media for crowdfunding would require purchasers to go through a verification process on a separate website proving that they are accredited investors.

The SEC has yet to finalize rulings on Title III of the JOBS Act, which would allow non-accredited investors to take part in equity crowdfunding. Legislators expect to see a proposal and commenting period within the next few months, which would be followed by a final vote.

While the overall impact that Title II has on IPO activity will take more time to evaluate, there’s no question that online equity crowdfunding will create a new and more expansive investor market – one that will require entrepreneurs and investors to stay engaged in and informed about in order to succeed. Industry organizations such as Crowdfunder.com have already partnered with internet and social media strategists to host education seminars and networking events where business groups and investors can come together to share ideas, insights and ask questions about the risks of equity fundraising and crowdfunding laws.

About the Author

Mark Stiles is an Assistant Vice President at William Gallagher Associates and a member of the ExecutiveRisk Practice. He works with private and nonprofit organizations to assist them and their executives with protection for their exposures to Directors’ & Officers’ Liability, Employment Practices Liability, Fiduciary Liability, Crime, Kidnap & Ransom and Extortion.

617.646.6743 | Mstiles@wgains.com | Connect with Mark on LinkedIn

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