Can The SEC Impact The Future Of Bitcoin Start-ups?
As the tech startup scene continues to emerge in hotspots throughout the U.S. and even the world, investors have been able to take advantage of increasingly varied opportunities for deciding where they wish to invest their funds. At the same time, Bitcoin, the digital currency, has become an increasingly popular method for storing wealth and conducting financial transactions. Until recently, crowdfunding for Bitcoin startups has been largely hampered due to a lack of regulations from the U.S Securities and Exchange Commission (SEC).
Now that the SEC has announced regulations that would allow crowdfunding for both new and small companies, Bitcoin startups could benefit from new sources of funding. Prior to the release of such regulations, companies were limited to raising significant amounts of funds by issuing securities or stock. Even then, they were only able to do so after submitting to an exhaustive and often costly registration process overseen by the SEC. For many companies, this has proven to be a significant market barrier due to the fact that many cash-strapped startups simply do not have the funding necessary to go through SEC registration. (For related reading, see article: SEC Filings: Forms You Need To Know.)
Benefits Offered to Bitcoin Startups Via the New SEC Regulations
Bitcoin startups have experienced a number of challenges to gaining backing from conventional investors, largely due to their non-traditional business approach. Crowdfunding platforms offer vast potential for such startups. For instance, via crowdfunding, Bitcoin startups in their formation stages could tap into funding opportunities without being limited by concerns about legislation violations. Also, instead of going through the full SEC registration process, Bitcoin startups can now take advantage of a mini SEC registration that is less time-consuming and expensive. This will allow such startups to sell securities online to regular investors, thus opening up a much larger pool of prospective investors.
Further benefiting Bitcoin startups is the relaxation of compliance requirements at the state level. With that said, such startups will still be required to submit fully audited financial statements. Additionally, startups will be required to engage in continued reporting to the SEC.
Although the relaxation of rules has opened up additional avenues of opportunity for Bitcoin startups, the sky is not the limit in terms of funding. Startups are limited in regards to the amount of funding that can be raised through a crowdfunding platform. These limits are based on the specific tier under which the startup is classified. Additionally, limits will be applied to the amount of capital that startups are able to raise on a per investor level. Such limits typically amount to about 10 percent of the investor’s annual income.
The restrictions to be placed on Bitcoin startup crowdfunding are significant, but most such startups have been quick to accept the new SEC rulings. Given the struggles that the digital currency industry has undergone in its efforts to gain acceptance from regulatory agencies and financial institutions, even a minor blessing from the SEC is considered good news
A Look Back At The Background Behind Crowdfunding
Crowdfunding got its start back in the spring of 2012 when the Jumpstart Our Business Startups Act, or JOBS Act, was authorized by Congress. Through this legislation, it became easier for small businesses to raise capital using the crowdfunding model. Under the initial specifications of the JOBS Act, companies were granted the ability to raise as much as $1 million within a 12-month period. Although the JOBS Act made significant strides in providing companies with the ability to raise investor funding, Congress still had concerns regarding the potential for investment fraud. In order to combat such risks, Congress included limitations regarding the amount of money that individual investors would be able to contribute. These limitations prevented investors from contributing more than five percent of their annual income, or $2,000, whichever amount was greater. Additionally, companies were required to make specific disclosures to prospective investors, and to conduct their crowdfunding through an intermediary, which meant going through a funding portal or broker-dealer that had already obtained SEC registration. (For related reading, see article: What Crowdfunding Means To Investors.)
In the fall of 2013, the SEC issued proposed rules that would govern the offer and sale of securities through a crowdfunding model. While that was a move in the right direction, it still left a tremendous amount of ambiguity when it came to crypto-currencies, ultimately leading to the question of whether tokens are considered securities. If digital currencies are considered securities under U.S. federal law, that would mean that the sale of such cryptocurrencies would have to be registered with the SEC.
Bitcoin companies have certainly faced their fair share of challenges in terms of regulation, and even what they are and are not considered to be. While the new rules issued by the SEC do not actually serve to clear up any ambiguity regarding the official federal definition of a security, they do offer a much less expensive method for Bitcoin startups that wish to avoid potential legal repercussions. (See article: What Is Bitcoin’s Intrinsic Value?)
According to the SEC, the new rules serve to update and even expand Regulation A, which allows small issuers of securities to be exempted from registration. Through this exemption, smaller firms will be given the ability to offer and sell as much as $50 million in securities during a 12-month period. Reporting, disclosure, and eligibility requirements do apply.
Two tiers of offerings are made available under Regulation A+. Under Tier 1, security offerings up to $20 million may be made during a 12-month period. Under Tier 2, security offerings up to $50 million may be made during a 12-month period. Additional disclosure and continuing reporting requirements apply to Tier 2, while basic requirements apply to Tier 1.
The Bottom Line
Since Bitcoin first emerged on the scene in 2009, the subject of currency and what actually defines currency has never been the same. Although a number of other cryptocurrencies have since emerged, none have held the same power and interest as Bitcoin, which has rapidly become a preferred alternative currency around the world, quickly attracting a veritable army of online and offline merchants willing to accept it. Around the world, Bitcoin has become increasingly popular, particularly among consumers living in countries where there are oppressive government restrictions and banking options are often limited. (To read more about investing in Bitcoin,
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