Keith Higgins, Director the Division of Corporate Finance of the SEC, travelled to the UK last week to keynote a speech at the Fifteenth Annual Institute of Securities Regulation in Europe. The speech, entitled; “International Developments -Past, Present & Future, launched into the premise of cross-border rationalization in dealing with securities markets. It was a bit of a trip down memory lane but when Higgins arrived to present day reality it stopped at an interesting juncture.
Thirty years ago the SEC undertook a study to review the internalization of capital markets. Since that time US investors have increased their holdings of foreign securities dramatically. The same may be said of international investors in holding US based securities. Clearly technology has fueled this shift. Capital markets are being driven by the demand of investors to have access to all types of assets – regardless of their base of operations or listing market. Of course, these global opportunities presented to investors add to the enforcement challenges of all securities regulators worldwide.
In looking forward, Higgins poses the question;
“…should the [SEC] staff explore a recommendation to create a system to specifically address public offerings made in several jurisdictions, especially when it would seem that the long-term trend is moving away from these offerings? Or would it be better for all market participants — investors, issuers, intermediaries, markets and regulators — for regulators to maintain an ongoing dialogue about the issues that are arising in various countries and how those matters are being addressed?”
Higgins then proceeds to discuss three topics that have recently been the subject of much discourse and, associated rule making. And what was at the top of the list? Investment crowdfunding.
The UK is broadly viewed as the gold standard regarding regulatory reform on many issues but in investment crowdfunding they have led the charge. The FCA being a fairly new entity replacing its predecessor, the FSA, in 2o13 as part of the shift in policy perspectives in light of the Great Recession. The FCA has, among other items, been an active participant in the success of both debt based and equity-based crowdfunding. While the UK has taken a wholeheartedly light touch approach, the US has endured an odyssey of rule-making measured in years with final rules that some consider workable but flawed.
When Higgins talks about US crowdfunding he addresses only Regulation CF (Title III of the JOBS Act). Meanwhile, the industry talks about internet finance including Title II, accredited crowdfunding, and Regulation A+ (a mini-IPO type offer). All three of these newer exemptions incorporate general solicitation, typically online. But what theUK has accomplished with a single rule set, the US has struggled through by crafting three different exemptions.
In February of 2105, the FCA did an interim review on their internet finance regulations, a process that was summed up in the statement; “we see no need to change our regulatory approach to crowdfunding, either to strengthen consumer protections or to relax the requirements that apply to firms”. Meanwhile, the crowdfunding industry has grown with issuing firms getting larger and platforms expanding their reach into funds, debt and other offerings. While no perfection exists, the industry is growing at a healthy clip.
Higgins is spot on in stating;
“Each jurisdiction has unique characteristics and what works in one jurisdiction may not carry over to another. Even so, I believe there is much that regulators can learn from one another as each works to address similar issues.”
He clarifies that “the United States and Canadian crowdfunding rules contain a number of other requirements and limitations that are not imposed in the United Kingdom, including caps on the amount of capital a company can raise in a 12-month period, holding periods for the securities, mandated use of a website, and financial statement disclosures.”
We do have a lot to learn from each other and creating a consistent approach that facilitates cross-border investment crowdfunding should be a topic of discussion. An investor willing to shoulder the risk should have access to appropriate markets. Issuers should be presented with a streamlined opportunity to raise capital online. The EU is already attempting to tackle this issue, to a degree, with their ongoing effort regarding the Capital Markets Union. European crowdfunding industry participants recognize the efficiency of a coordinated regime but also understand the immense challenge of accomplishing this goal. But hope springs eternal even though a rationalized approach is most definitely a long way off.
Internet finance, including crowdfunding and marketplace lending, is only going to continue to grow. Starting a thoughtful conversation sooner, rather than later, from a regulatory perspective is most certainly a preferred approach. That is as long as the participants recognize that best practices, and the countries that incorporate them, should lead the way.