Daniel Gorfine is the Director of Financial Markets Policy at the Milken Institute. He has long been a balanced, pragmatic voice in the crowdfunding conversation, which is why his recent piece in Washington Monthly should be cause for concern.
It’s important to note that the SEC’s recent action only addressed the sections of the law dealing with wealthy investors, not crowd investing. In fact, more than six months past its Congressional deadline to act, the SEC has still failed to even propose the regulations necessary to implement the crowd investing portions of the law. Some of this delay admittedly is due to the difficulties inherent in trying to introduce proper investor protections and education for less experienced crowd investors. But where does this leave crowdfunding now that accredited investors are getting the first shot at utilizing 21st century technologies to connect with and invest in companies, and with far fewer regulatory restrictions than those required for the crowd?Daniel Gorfine, Milken Institute
To summarize Gorfine’s take, he argues that due in part to actions within the SEC, wealthy investors have a leg up when it comes to crowdinvesting.
In my opinion the most notable fact presented here is what he cites as the “greater marketing flexibility” issuers will have in marketing 506(c) offerings versus crowdfunding offerings for non-accredited investors. In short, offerings limited to accredited investors will continue to have certain benefits over those for non-accredited investors.
There is also the issue of timing; while the crowdfunding space for non-accreds is in a perpetual state of waiting, crowdinvesting platforms catering to wealthy investors (who already have access to these types of investments) are free to begin to iterate first, learn from the market and adapt.
Then there is the million-dollar question: What type of flexibility will the SEC offer to crowdfunding intermediaries not registered as broker-dealers?
Broker-dealers are attracted to the accredited investor space because investment offering sizes are not capped and large generated fees can cover ongoing regulatory compliance costs. A broker-dealer has the freedom to screen potential company offerings and present key information to investors, such as a credit score or rating on a debt offering.
Platforms focused on the crowd, however, may not find it economical to register as broker-dealers due to the small-size of the transactions and small generated fees. If that proves to be the case, then the crowd could be left with non-broker-dealer funding portals to serve as intermediaries – not necessarily a bad outcome though heavily contingent on what the SEC permits these portals to do.
The net effect? Gorfine postulates that entrepreneurs “may opt to seek capital from accredited investors rather than the crowd.”
More of the status quo is not what the JOBS Act was created to facilitate. Yes, the injection of additional capital into startups and small businesses is stimulative regardless of whether it comes from accredited investors or non-accreds. However, part of the aim of the JOBS Act is to encourage non-accredited participation in the very types of investments they’ve been locked out of up until this point. Rules from the SEC need to encourage non-accredited participation in order to maximize the JOBS Act’s positive effect on US small businesses.