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Former SEC commissioner talks crowdfunding at PI Week

February 23, 2016

By Emily Offit C’17

On February 22, the start of Public Interest Week at Penn Law, former SEC commissioner Troy Paredes spoke about the SEC’s new crowdfunding rules, which could change the way that small businesses grow.

These new crowdfunding rules were adopted in October 2015 under the Jumpstart Our Business Startups, or JOBS, Act. Paredes served as SEC commissioner from August 2008 to 2013 and is currently a Distinguished Policy Fellow and Lecturer at Penn Law and a Lecturer on Law at Harvard Law School.

Paredes discussed the creation of the JOBS Act, a bipartisan effort to spur job growth and encourage investment in small businesses that was signed into law April 2012. The law aims to make going public more attractive for smaller companies.

Up until the creation of the JOBS Act, businesses looking to raise money could provide — for example — a t-shirt in exchange for public investment. But now, startups and other small businesses have the ability raise capital to fund themselves by issuing securities through crowdfunding.

“This allows for them to tap into a broad base of potential investors,” said Paredes. “Now you give 100 bucks and you can have ownership stake in the company. This may be worth less than a t-shirt, but it could be worth a whole heck of a lot.”

While crowdfunding can help individual businesses owners and the community in general, there are some concerns that come with this type of investment.

One of these concerns is that the issuer trying to raise money through the Internet is, in fact, fraudulent. Another concern is the “inherent riskiness of small businesses,” Paredes said.

Paredes then explained the set of requirements that attempt to mediate these concerns, including limits on the amount of money an issuer can raise while crowdfunding. In addition, the broker-dealers and funding portal intermediary platforms are heavily regulated through this act.

“Notwithstanding these requirements, crowdfunding under the JOBS act is a new way of raising capital that companies otherwise could not have undertaken,” Paredes said. “It may be difficult, but it allows flexibility beyond what would be available without this act.”

Due to the adoption of the new crowdfunding rules less than four months ago, Paredes is unsure what the future will bring for this new method of raising capital for small businesses.

“The notion of how a company raises money has undergone significant change — philosophically as well as the details — over the past four or five years,” Paredes said. “But whether one likes it or not? Time will tell as these things take hold.”

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