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Editor's Note: The following is guest post from David Drake, founder and chairman of New York-based Victoria Global with divisions LDJ Capital and The Soho Loft Media Group. Drake looks ahead to the new year, and makes guesses about what the year 2015 will (and will not) bring for crowdfunding. As always, guest contributors' opinions are their own and do not necessarily reflect the views of Crowdsourcing.org.
Over the years, the crowdfunding industry has made considerable progress enabling entrepreneurs in startups and small businesses to raise capital in different portals. Although regulation of the industry is still wanting, several changes are likely to happen in 2015. These will help shape how crowdfunding will be conducted in the United States. Here are some key predictions on the 2015 happenings in the crowdfunding scene:
It is two and a half years since the enactment of Jumpstart Our Business Startups (JOBS) Act in April 2012. However, equity crowdfunding will not become legal until 2016. The Securities and Exchange Commission (SEC) is yet to promulgate regulations to pave the way for unaccredited investors to invest up to one million dollars in companies through crowdfunding.
According to FA Magazine, the regulations are not going to be in place until the end of 2014. After the enactment of JOBS Act, the next step to effectuate it into law was for SEC to promulgate the necessary rules to regulate crowdfunding as required by Title III. In April 2014, the Investor Advisory Committee at SEC made public recommendations on crowdfunding regulations. The recommendations required SEC to revise some of the regulations, which make it difficult for small investors to invest in companies through crowdfunding.
However, the Financial Industry Regulatory Authority (FINRA) and SEC need to take further action. FINRA needs to come up with a control system to regulate financing portals while SEC has to develop the regulations. Considering that these processes are time-consuming and tedious in the US, which may take up to 1000 days for laws to become effective after enactment, crowdfunding regulations are likely to be promulgated in 2015 but will not take effect until 2016.
The Federal Funds Rate is likely to increase in spring 2015. Federal Funds Rate sets the standard for other interest rates. It is the rate at which institutions borrow funds from the Federal Reserve. It has a huge impact on economic activity as it may either regulate inflationary pressure or stimulate economic growth. The Federal Open Market Committee sets Federal Funds Rate targets and seeks to meet those targets through the open market functions.
In September 2014, Janet Yellen, the Federal Reserve Chair, said she expects the initial increase of Federal Funds Rate to happen six months after the asset purchase process concludes. This means that if asset purchase program proceeds on a $10 billion reduction pace each month, based on the 8 meetings scheduled for Fed in 2014, it is likely to conclude by the end of 2014. Based on the 6-month period suggested by the Federal Reserve Chair, the Federal Funds Rate is likely to increase during the 2015 spring. An increase in interest rates will most likely trigger a soft recession and tighten credit access.
This will be the first time the interest rates rise since June 2006. It will be the first time over a period of 6 years that Federal Funds Rates fail to fall within the current 0.00 and 0.25 percent target range. Fed will most likely utilize the 2004-2006 duration as a blueprint for the tightening program where interest rates were raised gradually 17 times over a 3 year period with increments of 0.25 percent.
SEC has released the proposed rules required under the JOBS Act to enable companies to buy and sell shares through crowdfunding in October 2013. If passed, the rules will require that crowdfunding transactions be undertaken by intermediaries that are registered with SEC either as funding portals and broker dealers. Offering will be done online via platforms run by registered funding portals or brokers, who will serve as a new form of SEC registrant.
According to the proposed regulation, it will be mandatory for crowdfunding platforms to make available information about the offering and the issuer, provide educational materials for investors, put fraud reduction measures in place, provide communication avenues that allow discussions on offerings on the online platforms, as well as facilitate the buying and selling of securities on crowdfunding platforms.
The proposed regulations prohibit crowdfunding platforms from soliciting sales or offers to purchase securities displayed or offered on their sites, offering recommendations or investment advice, imposing restrictions with respect to compensation of people and handling, possessing or holding investor securities or funds.
Should these regulations be passed, these requirements are likely to lead to closure of more crowdfunding platforms in 2015 than the number that are launched. The proposed rules would provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions.
In January 2014, Andreessen Horowitz pumped 20 million dollars into an online platform. Called Teespring, it is a crowdfunding intermediary for T-shirts that has grown pretty fast in its early stages attracting the interest of one of the biggest venture capital firms in the US. According to USA Today, Teespring will be moving beyond T-Shirts in the near future. This is not the first crowdfunding portal that Andreessen Horowitz has put money in. In 2013, Andreessen led Crowdtilt in raising some 23 million dollars in Series B funding. Following this trend, this VC firm will most likely set up a crowdfunding portal in 2015.
The need for well thought out rules that enable proper functioning of a free market was one topic that 2012 presidential candidates then, President Obama and Mitt Romney agreed on. Both supported free markets and believed that effective regulations are necessary for maintaining capital markets’ integrity. Though none of the candidates explained what their Presidency meant for investors and small businesses in the US, one of the regulations that would make a difference for these groups is the JOBS Act.
This piece of legislation is important for over 6 million small businesses employing almost half of all US workers in the private sector and for millions of US investors who are willing to support them through crowdfunding. According to President Obama, the JOBS Act is a revolutionary legislation that enables small businesses and startups access a large pool of new possible investors.
However, equity crowdfunding requires well-thought, targeted regulations that shield investors while ensuring value creation in the long term. Crowdfunding regulation is set to become a hot and controversial topic in the coming presidential elections as these define whether the market will develop or not.
David Drake is an early-stage equity expert and the founder and chairman of New York-based Victoria Global with divisions LDJ Capital, a family office and private equity advisory firm, and The Soho Loft Media Group, a global financial media company involved in Corporate Communications, Publications and Conferences. You can reach him directly at David@LDJCapital.com.