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SEC-NYU Dialogue on Securities Market Regulation: U.S. Securities-Based Crowdfunding - Welcoming Remarks

Acting Chairman Michael Piwowar

Feb. 28, 2017

Good morning, and thank you, Scott [Bauguess], for that kind introduction. It is a pleasure to be with you all on this beautiful Mardi Gras morning.

Thanks also to Alexander Ljungqvist and others from the Salomon Center for the Study of Financial Institutions at New York University, as well as the staff in the Division of Economic and Risk Analysis, for all of the preparation required to make an event like this happen.

Today’s Dialogue represents a collaboration of ideas and engagement among practitioners, academics, and regulators to discuss a topic that is receiving an increasing amount of attention: the state of the growing securities-based crowdfunding in the United States. The innovation, creativity, and job creation from small businesses are an essential component to fostering long-term economic growth. Economic growth cannot happen without access to capital by entrepreneurs and other small businesses. Thus, capital formation through crowdfunding permits the investing public to allocate capital to its most productive use.

In 2012, Congress passed — with overwhelming bipartisan support — the Jumpstart Our Business Startups (“JOBS”) Act, which required the Commission to think of capital formation and investor protection in fundamentally new ways. As adopted by the Commission, Regulation Crowdfunding is a key JOBS Act rulemaking that came into effect on May 16, 2016. This rule permits retail investors to be solicited to purchase unregistered securities of small private companies. This is a fundamental alteration of nearly 80 years of U.S. securities law practice.

Commission staff has begun to perform analyses on the data collected since Regulation Crowdfunding became effective. To date, 163 U.S. securities-based crowdfunding deals have been initiated, of which 33 have completed their fundraising. Over $10 million has been raised since the regulation went into effect, with most offerings still ongoing. Importantly, the rule further established a new type of intermediary, the funding portal, internet-based platforms through which all crowdfunding activities take place. There are currently 21 registered funding portals in the United States. Funding portals facilitate the sale of crowdfunded securities, provide investors with information and communications channels, and take measures to reduce fraud.

These aggregate numbers may seem small relative to the amount of capital raised in other private and public markets. However, these represent the mere beginning of an entirely new funding channel. In fact, some of the results you will see today will highlight the fact that many of the entities engaging in crowdfunding may not have otherwise had access to capital. This is an important issue discussed in the Commission’s economic analysis of the Regulation Crowdfunding — the intent of the JOBS Act was focused on new sources of capital for entrepreneurs and small businesses as opposed to just alternative sources of capital.

Crowdfunding is a creative, alternative approach to financing small business startups. Regulation Crowdfunding required the Commission to develop a completely new regulatory framework, designed to facilitate capital formation for startup companies — through direct investor participation — while providing a context for investor protection. Of course, achieving the goals of crowdfunding is not without challenges. Without sound protection of investors from fraud, it is unlikely that capital formation through crowdfunding will thrive.

As engines of economic growth, small businesses can more easily access capital from previously unavailable sources — directly from American investors. Through funding portals and the innovative use of the Internet, entrepreneurs are able to raise capital from a large number of investors. Further, these small investors have increased opportunities to invest in entrepreneurial ideas at earlier stages than ever before. Notably, these investors have greater opportunity to share information about projects, causes, ideas, and businesses with each other, and can use the “wisdom of the crowd” to decide whether to fund these small business campaigns.

Today’s Dialogue will focus on three core aspects of securities-based crowdfunding — the economic rationale and legal framework; investor protection and capital formation; and the empirical evidence and data. I am certain that the discussion today among practitioners, academics, and regulators will highlight the importance of this timely topic and will allow us to start to assess the real impact of Regulation Crowdfunding.

I look forward to seeing empirical studies of capital raising under the crowdfunding rules. I have concerns as to whether the final rules are too restrictive or too burdensome. Many of these restrictions are embedded in the statute itself. Based on the evidence, the Commission should consider whether any further steps should be taken to improve our crowdfunding regulations, including the use of exemptive authority. In addition, today’s Dialogue can provide helpful information for Congress to consider whether any legislative changes to the law should be made.

Thank you all for agreeing to spend your Mardi Gras with us so that we can benefit from your insights. I wish you a day full of enjoyable and fruitful discussions. Laissez les bons temps rouler!