Crowdfunding And The SEC: Deregulation Continues
It’s not especially well known that the retail / e-commerce juggernaut Groupon started life not as a provider of retail savings to consumers but as a nonprofit crowdfunding platform for communities called The Point. Groupon founder and former CEO Andrew Mason’s original software project let communities pool their money online to, for example, get a park built in their neighborhood or to solve some other community problem together. It was only later, after a nudge and a million-dollar check from a venture capital latecomer that Mason applied the same crowdfunding idea and software to coupons. The rest, as they say, is retail history.
The crowdfunding mechanism that Mason conceived and built took off in many different directions – his design has been copied by endless Groupon clones, and by enormously successful arts and cultural funding platforms such as Kickstarter. Crowdfunding in retail and the arts are fine, but the commercial property industry has to wonder: what about using crowdsourcing to raise private equity for, say, a commercial real estate investment?
As I’ve written in this blog before, the barrier to using online crowds to raise investment capital has traditionally been SEC regulation. There is a long-standing regulatory concept that protects investors from handing over money under terms they can’t be expected to understand fully, which has meant that the kind of generalized advertising of certain investment offerings that any crowdfunding site must traffic in are not allowed.
Or, were not allowed. Was a long-standing regulatory concept. Used to protect unsophisticated investors.
Continuing a long string of deregulation to rule 506 under SEC Reg D, on July 10, 2013, the SEC ended the prohibition of General Solicitation and General Advertising in certain offerings.
The final rule approved today makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that:
- The issuer takes reasonable steps to verify that the investors are accredited investors.
- All purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.
To my non-attorney* eye, this seems to clear the major barrier to crowdfunding of real estate investment. What was once a hard requirement to limit solicitation to investors meeting certain criteria of “sophistication” and “wealth” and “accreditation” has now been replaced with a far less rigorous standard: issuers of securities now must only take “reasonable steps” to verify that investors aren’t completely misunderstanding the terms of the investment…or aren’t precocious twelve year olds playing with the family Visa card online.
“Big Government”: Hardly Getting Bigger
People who make hay with constant rhetorical complaining about government getting in the way of business get awfully quiet when deregulation like this comes along: by consigning to the scrap heap the heart of the SEC Reg D rules that once absolutely required potential investors in certain issues to have “sophistication” and thereby have eyes wide open in the deal, the connection of crowd-funded capital with commercial real estate portfolios is very likely to charge forward on crowdfunding investment sites such as EarlyShares or Realty Mogul and others. Was the investor protection unnecessary? Time will tell.
We’ll be watching the results with hope that the commercial property industry does great things with its new, government-approved crowdfunded capital source.
It’s up to issuers now.
* NEVER EVER take anything you read here at The Source as legal or fiduciary advice. Always retain qualified counsel.
(Photo credit: Anirudh Koul)