The Securities & Exchange Commission recently unveiled its long-awaited proposed rules for equity crowdfunding.
The 585-page proposal lays the framework that would allow businesses to raise up to $1 million a year from the public via online crowdfunding portals.
While the rules contain some contentious points that might prove onerous to startups -- particularly one that would require firms raising more than $500,000 to submit audited financial statements -- experts say they're a step in the right direction.
"I think the fact we have proposed rules is great," says Jason Best, co-founder of Crowdfund Capital Advisors in San Francisco and co-author of "Crowdfund Investing for Dummies" (Wiley; $26.99).
The industry's been awaiting the rules since passage of the Jumpstart Our Business Startups Act in April 2012, paving the way for one of the largest changes in securities laws in 80 years.
Long Island businesses are already making use of Title II of the JOBS Act, which went into effect in September and lifted the ban on private companies, including startups, doing "general solicitation" -- advertising investment opportunities -- to "accredited" investors. Accredited investors include high-income or high-net-worth individuals.
David Rhee, co-founder of Hauppauge-based ConnectOnCall, a digital on-call answering system for physicians, says implementation of Title II allowed his company to launch a crowdfunding campaign to accredited investors on Return on Change, an online investment platform. ConnectOnCall is looking to raise $750,000, for a 20 percent equity stake, says Rhee, who founded the company with fellow ophthalmologists Brett Rosenblatt and Vincent Deramo.
The firm has developed an app-based technology that allows physicians to bypass a calling service and retrieve patients' private messages in a HIPAA-secure environment, with the ability to review patient data, speak with the patient and document the call. (HIPAA is the Health Insurance Portability and Accountability Act.)
The next phase of the JOBS Act, Title III, would allow small businesses and startups like ConnectOnCall to raise funds via the public at large -- so-called "nonaccredited" investors.
Previously, public solicitation or advertising of private equity investments to non-accredited investors was, for the most part, prohibited, limiting the pool of individual investors to those with annual income above $200,000 or net worth above $1 million, says Best, who helped create the crowdfunding investing framework used in the JOBS Act.
Last fall, the SEC issued proposed rules to implement Title III, with a 90-day public comment period that ends next Monday, says Phillip Laycock, an audit partner at Grassi & Co., which has offices in Jericho and Manhattan. Some experts predict rules could be finalized by this summer. The SEC hasn't specified a date, but spokesman John Nester said SEC Chair Mary Jo White "has often noted that the JOBS Act rule-making is a priority."
Among the positives, the proposed rules require crowdfunding platforms to provide investor education to potential investors and also allow for parallel offerings, so startups could pitch offerings to both accredited and non-accredited investors simultaneously, says Best.
Rhee said ConnectOnCall may tap non-accredited investors as well. "Crowdfunding offers a huge potential to reach a large investor base," he says.
On the downside, compliance costs could be steep. For one, firms raising more than $500,000 would be required to submit audited financial statements, explains Laycock.
Hiring an accounting firm to prepare audited financial statements could cost $18,000 to $25,000 on the low end, he notes, though that could be less for startups. For some smaller firms these costs could be a deterrent, says Laycock.
"Audited financial statements for companies of this size is a huge expense," agrees Joanna Schwartz, CEO of Miami-based EarlyShares, one of the earlier equity-based crowdfunding platforms. She's optimistic this concern will be taken into consideration as part of the SEC's final review process.