Crowdfund Insider | Doug Ellenoff | May 3, 2016

Two years after Title II of the JOBS Act, known as 506(c), went into effect well over one billion dollars of financings have been closed through online funding portals under this provision and 506(b).

The year over year growth has been substantial.  Entrepreneurs and real estate professionals have benefited and so have investors.  Even with all that activity so far, there has been very limited reported fraud- one maybe two at most, representing significantly less than 1% of the capital raised. This is not to suggest that there won’t be more and no doubt other legitimate investor losses as well, but online 506(b) and (c) has thus far delivered on the promise of an alternative way for entrepreneurs to raise capital, for investors to participate in opportunities not previously available to them, and equally importantly, for this not to become a regulatory burden.

The data suggests that nearly two thousand such entrepreneurs have received such funding, which inevitably creates jobs.  The key being that the balance of interests between capital formation and investor protection (from fraud, not losses) has been more than satisfied so far.  The voiced concern of overwhelming fraud has not materialized and regulators generally acknowledge this reality.

See:  SEC Approves Title III of JOBS Act, Equity Crowdfunding with Non-Accredited

All crowdfunding constituents continue to need to remain vigilant and keep the problems limited.  We all share this responsibility if we want to benefit from this considerable departure from old securities law conventions. Building on the strength of this new approach to permitting capital formation, May 16 of this year marks the date upon which the third provision relating to crowdfunding under the JOBS Act, Regulation CF, makes available unregistered investment opportunities to all Americans.  This isn’t open to debate, it’s the law. You might be surprised at how many events that I attend where panelists and attendees continue to debate the issues as if we were still in a time warp prior to the JOBS Act enactment in 2012.

For all of the genuine concern, many of these folks have neither read the Regulation CF rules, don’t fully appreciate the construct of the statute and rules, nor care to recognize that these rules came to be after a bi-partisan congressional action, signed by the President and extensively considered and refined by both the SEC and FINRA after four years of comment letters by both supporters and detractors of the legislation have had full opportunity to share their comments.

As a participant and observer, I am proud of what Titles III Regulation III Crowdfunding represents, how thoughtful the final rules are, the care and consideration that the staff members of both the SEC and FINRA have put into making the final approved rules viable and the institutional restraint from being inflexible. Moreover, tremendous credit must be given to the perseverance of the industry and the individuals that stayed the course and engaged in the process- this truly was a crowdsourced effort.

- Doug Ellenoff is Managing Partner of Ellenoff Grossman & Schole LLP,

We are well aware that there are investor protection concerns and believe that the current rules are quite respectful of those interests.  We are also aware that some market participants must make a more concerted effort to fully recognize that this is a highly regulated industry for good reason and their business processes must become more compliant in order to protect investors even better.  Certainly, we also support continuing efforts to address aspects of the final rules which would make the final rules more commercially viable.  If the securities activity that gets transacted after May 16 under Regulation CF is as responsibly undertaken by the online 506(b) and (c) community, then legislators will have the necessary momentum to take additional positive action beneficial to the industry.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 1300+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at ncfacanada.org.