Big Changes in Store for Crowdfunding Under President Trump

We’ll soon find out if President Trump is really for the average American.

My litmus test is a little different from that of the media or political pundits.

They’re looking at his proposal for taxes, what he’ll do to promote job growth and his plans to fix inner-city problems.

I’m looking to see what he’ll do with crowdfunding.

The JOBS Act was signed into law on April 5, 2012. Since then, we’ve made a lot of progress.

The JOBS Act instructed the SEC to issue regulations expanding the circle of those with the right to invest in startups to include everybody, not just a small wealthy group of people.

It took a while, but last year we finally saw these regulations come to light. Now anybody can invest in private companies that choose to raise under Regulation Crowdfunding and Regulation A+. (More here and here on how these new regulations work.)

But that’s not the end of the story.

Not all restrictions were lifted.

For example, startups raising under Regulation D continue to be available only to accredited investors.

Several sites like AngelList and MicroVentures list dozens of Reg D offerings, but they’re only accessible to investors earning more than $200,000 (as individuals) or $300,000 (as couples).

Another way to qualify is to have a net worth of at least $1,000,000. But excluding the primary home means that millions of Americans don’t qualify under this criterion.

Millions of Americans Left Out

I visit these sites every day. I see hundreds of deals that the vast majority of Americans can’t invest in.

The reasons are ridiculously out of date.

These restrictions were included in the Securities Act of 1933. They come from the same line of “big brother” reasoning that also gave us the ban on women’s suffrage and the ban on cannabis.

It’s for our own protection, the government says. Better to be safe than sorry.

Which makes this moment in history particularly interesting.

Trump ran on an anti-elitist deregulation platform. After he was elected, he cited the need to “undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.”

Freeing up more capital for ambitious young companies would also promote jobs, another big Trump promise.

You can see why this is the perfect litmus test for the Trump presidency.

So what can President Trump do?

All the Pieces in Place

He has only to look to Congress.

Last December, the House approved a package of previously passed bills rolled up into a single piece of legislation. It makes it easier for companies to raise online.

It also included legislation expanding the definition of “accredited investor” to include a greater number of people. Currently, it’s income-based.

The bill adds knowledge and experience criteria.

For example, people with securities-related licenses could qualify as accredited investors.

Or people with education or experience related to the investment itself could invest. For example, a fitness trainer would be allowed to invest in a fitness wearable.

Another measure increased the money companies can raise from $1 million to $5 million (under Reg CF). You can read more about this bill (the Fix Crowdfunding Act) in the article we posted last year.

More recently, Congress asked the SEC to review the caps allowed under Reg A+, with a view to raising them at some point in the future – possibly at the discretion of the SEC chair. They’re now set at $20 million for Tier 1 and $50 million for Tier 2.

It seems that all the pieces are in place to make it easy for the Trump administration to enact reform in the crowdfunding realm.

That includes one important piece I haven’t mentioned yet… the appointment of the SEC head.

Late last year, I said that Trump needs to “appoint an SEC chairman that shares his view of a government giving free reign to the fundraising activities of private startup companies, and charge them with fixing recent rules from the SEC.”

Well, Trump selected Walter “Jay” Clayton to chair the SEC.

Clayton comes to government from the law firm of Sullivan & Cromwell. He has a corporate securities background with a specialty in mergers and acquisitions. He participated in the IPO of Alibaba.

Clayton has a history of working more with very large firms than small ones. But let’s not forget he’s a Trump appointee. 

I would expect he’d have no problem following his boss’s deregulation and pro-capital formation policy initiatives.

Trumping the Washington Factor

This should be a slow curveball for Mr. Trump. The question isn’t why he should change the rules.

The question is, why shouldn’t he?

Since the first of these regulations were issued in May of last year, about 200 companies have conducted private raises under them. Trump’s challenge is to raise that level from the hundreds to the thousands.

If he accomplishes this feat, he will then have to encourage the 96% of the population not currently qualified as accredited to dedicate a portion of its investment capital to the growth of these companies during their early and fragile stages as private companies.

We have a crowdfunding issue that needs fixing and a president who has the outlook, mandate and power to fix it.

Seems like it’s going to happen.

Then again, it’s Washington, where so many sensible fixes go to die.

Will this time be different?

What do you think? I’m interested in hearing your views of how our new president could impact the crowdfunding sector.

Invest early and well,

Andy Gordon
Founder, Early Investing