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Sherwood Neiss Responds to WSJ’s Critique of Regulation A

Reg A | Jun 17, 2024

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Crowdfunding Pioneer Sherwood Neiss responds to the WSJ's critique of Regulation A

As reported on Crowdfund Insider, on June 13, 2024, Sherwood Neiss, a pioneering voice in the investment crowdfunding field, responded to a Wall Street Journal (WSJ) piece criticizing Regulation A (Reg A) crowdfunding. The WSJ story raised concerns about Reg A's effectiveness and honesty, which Neiss strongly defended, citing the regulation's role in democratizing access to capital.

Understanding Regulation A/A+

Regulation A provides an exemption from registration for public offerings. Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period, and Tier 2, for offerings of up to $75 million. Companies with offers of up to $20 million can choose to proceed under Tier 1 or Tier 2 standards.

See:  Insights and Challenges of Raising Capital via Reg A+

This rule enables corporations to offer and sell securities to the public without meeting the stringent standards of a full public offering, making it an appealing choice for startups and small businesses.  Among the many checks and balances, companies who use this exemption to raise capital, to fuel the launch or growth of their business, must submit documentation to the Securities and Exchange Commission so that the offering can be "qualified" and approved so that they can raise money online through an intermediary or directly on their own platform.

WSJ's Critique

The Wall Street Journal article opined about the challenges with Regulation A.

  • According to the report, fraudulent entities abused Reg A, resulting in significant investment losses.
  • It criticized the SEC's apparent lack of severe control, claiming that this laxity has allowed inferior corporations to take advantage of the regulations.
  • According to the article, Regulation A has not been as successful as expected in assisting businesses in raising significant capital.

Sherwood Neiss's Response

Sherwood Neiss, a principal at Crowdfund Capital Advisors and a well-known personality in the equity crowdfunding industry (who has also served as an advisor to NCFA since 2017), responded in depth to the WSJ report - you can read his response here. Neiss, who has helped shape global equity crowdfunding regulations, gave a counter-narrative stressing Reg A's positive influence.  Neiss runs a data aggregator business so his insights are backed by significant data collection and analysis, so it's more of an accurate picture than anecdotal evidence.

See:  CCA Report: Investment Crowdfunding 2024: Key Insights

Neiss mentions that investment crowdfunding has had a $7 billion economic impact - that's growing and pretty significant in our opinion. He also pointed out that these investments do more than just raise capital; they stimulate local economies, create jobs, and support diverse entrepreneurs including women and minorities far more than traditional venture capital.

He continues to say that there have been 8,500 offerings and more than $2 billion raised indicating that equity crowdfunding is growing at scale. Neiss attacks the WSJ for cherry-picking examples to present a bad picture, claiming that the vast majority of businesses benefit tremendously from these chances. This broad perspective demonstrates the potential for major innovation and economic contributions from these early-stage businesses.  This all contrasts with the WSJ's portrayal.

Neiss addresses concerns about investor protection by highlighting the stringent requirements under Reg CF and Reg A, such as audited financial statements and mandatory annual reports. These measures enhance transparency and investor safety, countering the WSJ's implications of lax oversight.

"Unlike Regulation D (Reg D) offerings, Reg CF and Reg A impose stringent requirements to protect investors. Issuers under Reg A are mandated to provide audited financial statements and adhere to rigorous SEC disclosure requirements. Additionally, Reg CF issuers must provide annual reports to keep investors informed—another layer of transparency absent in Reg D offerings. In both these offerings, retail investors are capped at how much they can risk."

See:  Fintech Fridays EP62: The Future of Investment Crowdfunding: Innovations, Data, and Opportunities

Neiss advocates for a balanced view that takes into account the inherent risks in all types of startup funding, including traditional techniques such as venture capital and angel investments. He emphasizes the democratizing effect of equity crowdfunding, which makes investment opportunities available to a broader audience beyond accredited investors.

"Your article needs to acknowledge the high failure rates of startups funded through traditional avenues such as VC and angel investments under Reg D."

The Future of Regulation A

While obstacles still exist, the law has clearly created new ways for small firms and entrepreneurs to acquire funding. As the sector evolves, stakeholders must work together to address concerns, strengthen protections, and promote a balanced narrative.  It is equally crucial to acknowledge and celebrate the successes and possibilities of such regulations. By promoting openness, education, and balanced reporting, the crowdfunding community may contribute to a more inclusive and effective capital-raising landscape.


NCFA Jan 2018 resize - Sherwood Neiss Responds to WSJ's Critique of Regulation AThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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