The increasing popularity of crowdfunding to raise capital for small businesses could actually complement credit union business lending, not compete with it, said one industry expert.
Crowdfunding is a term used to describe a method of raising money, usually through the Internet, to generate financial support for such things as films and music recordings, typically through small individual contributions from a large number of people.
“Crowdfunding is an exciting new development in capital raising, but it is not a competitor to credit union business lending,” said Bill Beardsley, president of Michigan Business Connection LC, a commercial lending CUSO in Ann Arbor, Mich. “Instead, capital raised from these investors could complement traditional lending to help balance the risk.”
Generally speaking, most entrepreneurs that use crowdfunding went that route because they either tried to get a loan but couldn't qualify, or they weren't able to get the total amount of funding requested, Beardsley said.
“This could be a complementary thing for credit unions. Banks and credit unions want to take a more conservative risk profile with new companies,” Beardsley explained. “The ability to fund with nonfinancial players may be of benefit to credit unions.”
On Oct. 23, the Securities and Exchange Commission voted unanimously to propose rules that would permit companies to offer and sell securities through crowdfunding. Under the proposal, a company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
Over the course of that period, investors would be permitted to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
Investors would also have the choice of investing 10% of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
“There is a great deal of excitement in the marketplace about the crowdfunding exemption, and I'm pleased that we're in a position to seek public comment on a proposal to permit crowdfunding,” said SEC Chair Mary Jo White, in a statement. “We want this market to thrive in a safe manner for investors.”
The SEC said while crowdfunding can be used to raise funds for many things, it generally has not been used as a means to offer and sell securities. That is because offering a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and an offer or sale of securities must be registered with the SEC unless an exemption is available, according to the agency.
Title III of the JOBS Act created an exemption under the securities laws so that this type of funding method can be easily used to offer and sell securities as well, the SEC said. The JOBS Act also established the foundation for a regulatory structure for this funding method. Signed into law on April 5, 2012, by President Obama, the JOBS Act was designed to encourage funding of U.S. small businesses by easing various securities regulations.
The SEC said certain companies would not be eligible to use the crowdfunding exemption including non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.
Indeed, White said that the intent of the JOBS Act is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors.
To prevent companies from fraudulently raising money for suspicious ventures, the SEC said one of the key investor protections Title III of the JOBS Act provides for crowdfunding is the requirement that transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.
The proposed rules would require these intermediaries to provide investors with educational materials, take measures to reduce the risk of fraud and make available information about the issuer and the offering. The intermediates would also be required to provide communication channels to permit discussions about offerings on the platform and facilitate the offer and sale of crowdfunded securities.