Home' Trinidad and Tobago Guardian : November 1st 2015 Contents NOVEMBER 1 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
PERSONAL FINANCE | SBG13
Anew form of crowdfund-
ing is coming soon that
will allow startups to raise
money by selling stock to
main street investors.
The Securities and Exchange Commis-
sion on Friday adopted rules implementing
a 2012 law that opened the door to secu-
rities crowdfunding. The vote was 3-1 at
a public meeting.
For years, artists, charities and entre-
preneurs have used the power of the Inter-
net to generate money for projects. Now
starting in mid-2016, businesses will be
able to offer investors a piece of their com-
pany by legally selling stock online.
For investors, it's a chance to make a
small profit and possibly get in early on
the next Twitter, Instagram or Uber.
But it's also entails high risk, given that
a majority of startups fail. About half of
all small businesses shut down within the
first five years. Some critics also warn that
investment crowdfunding is ripe for fraud.
The new SEC rules "won't prevent the
kind of fraud" that can arise in conventional
online scams, said Mercer Bullard, a law
professor at the University of Mississippi
who is a mutual-fund investor advocate.
"You can embezzle someone's money in
the guise of making a securities offering,"
Bullard said in a telephone interview.
With an eye to protecting investors, the
crowdfunding securities offerings can only
be made through brokerage firms or new
Internet funding portals which must be
registered with the SEC.
SEC chair Mary Jo White said before the
vote that agency staff "will begin imme-
diately to keep a watchful eye on how this
They will assess what kinds of companies
use the new crowdfunding offerings, how
closely they follow the rules and whether
the new practice promotes the raising of
capital while also protecting investors.
Under the new rules, people with annual
income or net worth less than US$100,000
will be allowed to invest a maximum of
five per cent of their yearly income or net
worth, or US$2,000 if that is greater. Those
with higher incomes can invest up to 10
per cent. An individual can't invest a total
of more than US$100,000 in all crowd-
funding offerings during a 12-month peri-
od.Investors generally couldn't resell their
crowdfunding securities for one year.
For their part, companies will be allowed
to raise a maximum of US$1 million a year
from individual investors without registering
with the SEC.
Companies will have to provide infor-
mation to investors about their business
plan and how they will use the money they
raise, as well as a list of their officers, direc-
tors and those who own at least 20 per
cent of the company.
The SEC was given some discretion in
the 2012 law, known as the JOBS Act, in
the information to be demanded from com-
panies and limits imposed on investments.
Republican Commissioner Michael
Piwowar voted against the crowdfunding
initiative because he said the new rules
were too strict and will discourage many
companies from participating.
The SEC proposed the crowdfunding
rules two years ago. Waiting at the starting
gate for the final rules to take effect: legions
of startups in areas such as packaged food,
medical and biotechnology, restaurants and
The goal of the 2012 law was to help
entrepreneurs raise money quickly when
they couldn't attract attention from venture
capitalists or traditional deep-pocketed
investors. At the same time, the law eased
the SEC's regulatory reach by giving the
startups an exemption from filing rules.
The rationale was that new businesses in
a hurry to raise money would be hampered
by having to submit paperwork. It was an
about-face for Congress after expanding
the SEC's powers only two years earlier in
response to the 2008 financial crisis.
Supporters say investment crowdfunding
could be a boon to the economy: more
businesses create more jobs and that boosts
economic growth. And many of the com-
panies that could benefit are in overlooked
areas of the country, such as the Midwest
or Southeast, the promoters say.
But some investor advocates and other
critics express concern that this new arena
of investing could be a breeding ground
The state securities regulators' association
warns investors to be "extremely cautious"
about crowdfunding. It says companies
raising money this way may be inexperi-
enced or even fraudulent. Investors may
be on their own to pursue private lawsuits
against companies when things go awry,
and it may be difficult or impossible to
resell the securities. AP
EAT, a British sandwich chain, was looking for
USUS$20 million last year to dress up its stores. It
knew conventional banks would be hesitant to provide
such a loan, given its existing debt. Worse, it soon
would need to borrow more, to fund a rapid expan-
It turned to Ardian, an investment firm, which
lent it USUS$61 million, not only for the refurbish-
ments, but also to refinance its existing debt and to
open 90 new stores.
Although Ardian is charging a heady 15 per cent
interest rate, Strahan Wilson of EAT said, it is much
less bureaucratic and more flexible than a bank. That
has allowed EAT to expand a year to 18 months faster
than it otherwise could have.
What is more, he added, "Now that we've estab-
lished this relationship with Ardian, if we need more
capital, we need only ask."
The easiest way for institutional investors to lend
to companies is to buy bonds. Many also buy loans
originated by banks and repackaged into securities,
or invest in funds that purchase nonperforming loans
from banks. Before the financial crisis American funds
began investing in private debt, as opposed to the
sort available publicly on the bond markets. This
involves providing credit directly to companies that
either cannot borrow from banks and bond markets
or do not like their terms.
It is in Europe that private-debt funds have been
proliferating recently. European businesses depend
heavily on banks, but changes in capital rules have
made it relatively expensive for banks to lend to them.
Securitisation, meanwhile, earned a bad name during
the financial crisis. Standard & Poor's, a rating agency,
estimates that middling European companies will
need around US$3.3 trillion in new loans during the
next five years.
Money managers are eager to fill the gap: US$70
billion already has been raised for private debt this
year, says Preqin, a data provider, US$2.2 billion of
it by Ardian. Pension funds and insurers like private
debt because returns tend to be much higher than
in the bond markets: Pitchbook, a data provider, says
that yields of between nine per cent and 12 per cent
have been typical in recent years.
That cannot last. For one thing, the market has
yet to be tested by widespread defaults. Interest in
private debt in America has waned in recent years,
as intense competition has driven down returns.
"We're getting better returns in Europe than in
America for taking on the same risks," said Jim Blake-
more of Green Oak, which lends to property devel-
Europe seems to be heading the same way, however.
The average fund raised this year is three times bigger
than in 2008. Smaller, specialist funds also are spring-
ing up in niches such as healthcare or airplane finance.
It does not help that most lending so far has been
to firms backed by private equity, such as EAT.
Many of the conservative, family-owned European
companies that are short of credit still would not
dream of borrowing from anything but a bank. How
fast that changes will determine the industry's for-
US SEC opens door to
startup investing for all
of first resort
could be a boon to the
businesses create more
jobs and that boosts
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