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Posted almost 10 years ago

Unintended Consequences Of Title III - "Protecting" Non-Accrediteds

It is interesting how legislation has evolved around what used to be coined "The Entrepreneur Access To Capital Act" that sprung up during the height of the mortgage crisis. Previous platforms like Kickstarter dodged securities laws by having folks donate money instead of buying equity shares. A group of people then lobbied Congress to revise the horribly inefficient and antiquated securities laws in an effort to try to clean up dodging like what some of the more popular sites like Kickstarter were working with. After SEC foot-dragging we were left with what was later coined The JOBS Act. Who couldn't vote for creating jobs in the middle of the crisis? The bill sailed through Congress.

Unfortunately the SEC continued with their foot-dragging after the bill became the law of the land. The chairperson has since changed and Title II is well underway. Many crowdfunding portals have sprung up in the last 6 months and I fully expect more to come online later this year. The models are all quite different and there are some major functional problems the SEC has caused based on the rules they have set forth. Chief among them is the functional friction caused by needing to "reasonably" verify folks are accredited under Title II. Third party verification services have not solved how to do this reliably on the basis of net worth and people are loathe to give up social security numbers to distrusted sites for income verification as well. By eliminating self-certification it appears the SEC is trying to make some of the changes enacted by Congress functionally illegal in form if not in substance.

The most ludicrous item currently making the rounds is the reporting requirements under Title III. Title III will open up investing in what used to be private placements to non-accredited investors. These offerings are not called private placements anymore because they're not private, but they're functionally the same save the ability to publicly advertise for investors. Under Title III the proposed rules are to force startups to get more stringent financial statements for raises over $100k. This requirement will cause promoters who are raising money to limit their raise to $100k to avoid this reporting requirement and will make the MOST risky part of the capital stack what non-accredited investors end up being offered. The rest of the equity capital stack will be filled out by accredited investors or using some other form of financing. Thus the government will be "protecting" non-accredited investors by forcing them to only be able to invest in the riskiest part of the project.

Please write to the SEC and explain how nonsensical this methodology is and how it will be to the detriment of investors. If would be lovely if the SEC would just follow the spirit of the new law and allow everyone to invest equally in projects as the legislation intended.


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