Can Equity-Crowdfunding Fill the Stock Market’s “Black Hole”?

Announced earlier this week on TheCorporateCounsel.net, the final regulations concerning equity-crowdfunding (JOBS Act) will likely surface in late 2014. The Financial Industry Regulatory Authority and the Security and Exchange Commission both feel that more time is needed for this decision, despite the public’s growing impatience.
Although this news disappoints many non-accredited investors awaiting the opportunity to crowdfund capital, a few changes will emerge in September that should assist start-ups in the interim.

With the repeal of the general solicitation rule coming up next month, businesses will be allowed to publicly market their securities. By doing so, new businesses will not only have the chance to raise money and stabilize in the economy’s current climate, but companies looking to expand now have an alternative to the stock market. Marc Cuban, an outrageously successful businessman and owner of the Dallas Mavericks, believes equity-based crowdfunding may be a great new source of capital now that the stock market has become “a platform not for creating capital to help companies grow, but a platform for financial hackers, where most of the activity is just algorithmic and high-frequency trading.” Ever since trading stocks online became a trend, the number of IPOs per year has dropped considerably — the value of each IPO has decreased as well. If equity-crowdfunding is the solution to the stock market’s “black hole”, then approving and instating the last of the regulations should be a high-priority.

In Canada, progress has been made in recent months between the Ontario Securities Commission and MaRS VX. When this news first came out, we covered the story [click here]; but since then, the OSC has granted the web portal an exemption for two requirements: “know-your-client” and “suitability”. Essentially, these requirements stipulate that restricted dealers must obtain information on each and every client, as a way to protect investors and campaigners. Now that the OSC has waved these two conditions, Canada’s being introduced to equity-crowdfunding for the first time. Are these changes happening quick enough, however, is a question on many professionals’ minds.  As the SEC continues to stall in the US, many fear that the impact of equity-crowdfunding is diminishing. As a financial tool, it holds great potential; but for it to have a full-effect, we need to see further developments in the near future.