Thursday, October 31, 2013
I have argued that, because of excessive regulatory costs, the new crowdfunding exemption in section 4(a)(6) of the Securities Act is unlikely to be as successful as hoped. (Rule 506(c) is another story; I expect that to be wildly successful.)
We now know what the SEC anticipates. Hidden deep within the SEC’s recent crowdfunding rules proposal is the Commission’s own estimate of the likely impact of the new exemption. (It’s on pp. 427-428, in the Paperwork Reduction Act discussion, if you want to look at it yourself.)
How Many Crowdfunded Offerings?
The SEC estimates that there will be 2,300 crowdfunded offerings a year once the new section 4(a)(6) exemption goes into effect, raising an average of $100,000 per offering. That’s a total of $230 million raised each year.
How Many Crowfunding Platforms?
The SEC estimates, “based, in part on current indications of interest” (p. 380) that 110 intermediaries will offer crowdfunding platforms for section 4(a)(6) offerings. Sixty of those will be operated by registered securities brokers and the other fifty will be operated by registered funding portals. (Non-brokers may act as crowdfunding intermediaries only if they register as funding portals.)
The Fight to Survive
If the SEC’s figures are correct, and who really knows, that’s an average of approximately $2 million raised per crowdfunding platform. I would expect many of those 110 platforms to fail rather quickly. Given the regulatory and other costs involved, crowdfunding intermediaries won’t survive for very long on 10-15% of $2 million a year. The SEC doesn’t appear to think so, either. They note (p. 380) that “it is likely that there would be significant competition between existing crowdfunding venues and new entrants that could result in . . . changes in the number and type of intermediaries as the market develops and matures.”
Of course, as the proposal itself indicates, it’s impossible to predict exactly what will happen when the rules become effective. But it’s at least interesting to see the SEC’s own guesses.