February 1, 2012 / 8:00 PM / 8 years ago

SEC advisory panel concerned about crowdfunding

WASHINGTON, DC (Reuters) - An advisory committee urged U.S. securities regulators on Wednesday to relax outdated rules that trigger public financial reporting for companies, but it stopped short of backing a new capital-raising strategy known as “crowdfunding.”

In a public meeting, members of the Advisory Committee on Small and Emerging Companies voted on two proposed regulatory changes for the Securities and Exchange Commission to consider that would help private companies raise capital.

However, they raised concerns with crowdfunding, a new capital-raising strategy that lets investors take small stakes in private start-ups over the Internet, even though the idea has received some support from President Barack Obama and Congress.

The panel said it needed more time to study the issue to ensure it does not lead to investment scams.

“This is just an opportunity for fraud in the extreme,” said committee co-chair Stephen Graham, who advises on securities offerings as co-chair of Fenwick & West’s Life Sciences Practice.

“You can just imagine the unsophisticated investor that is just bombarded on the Internet.”

Since last year, the SEC has been conducting a broad review of outdated securities regulations that have not kept pace with the evolution of social media sites such as LinkedIn and Facebook, and with the structure of fast-growing startups.

To assist with the process, the agency announced last year it would establish the small business advisory committee to help determine the best course of action.

Obama has also unveiled a proposed legislative agenda outlining several initiatives to help small businesses raise capital, including crowdfunding.

The U.S. House of Representatives has passed a series of measures that would address many of the areas outlined in the President’s plan. Those measures, however, have yet to face a vote in the U.S. Senate.

Despite concerns about crowdfunding, the majority of the panel did agree on two separate plans that would ease the rules for public financial reporting and for mini-offerings known as “Regulation A.”

One proposal would raise the number of shareholders of record that trigger a company having to file public financial documents, from 500 under the current regulations to 1,000 for most companies.

Stock-holding employees would be excluded from the tally as long as they are not trading, and community banks would be subject to an even higher reporting threshold of 2,000.

The committee suggested that the SEC put interim rules in place to provide immediate relief for companies, and then launch a study to ensure the new thresholds are appropriate.

The panel also backed a similar proposal to Obama’s on the SEC’s Regulation A exemption, which is meant to help smaller companies avoid filing costly and time-consuming paperwork associated with SEC registration for public offerings.

Because the offering amount under Regulation A is only $5 million, the benefits of the exemptive relief are underutilized.

The panel recommended raising the threshold for Regulation A to $50 million from $5 million.

Reporting By Sarah N. Lynch; Editing by Gary Hill

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