New U.S. Regulations Could Impact FinTech Startups


The Jumpstart Our Business Startups Act (JOBS) was passed by the United States Congress in 2012. It contains seven titles:

Title I: Reopening American Capital Markets to Emerging Growth Companies
Title II:  Access to Capital for Job Creators
Title III: Crowdfunding
Title IV: Small Company Capital Formation
Title V: Private Company Flexibility and Growth
Title VI: Capital Expansion
Title VII: Outreach on Changes to the Law

Titles I, V, and VI became active immediately. Title II has been partly started, and title VII is most likely already in effect.

Title III, Crowdfunding, is currently in a comment period, after which a final rule will be promulgated. This procedure requires the publishing of a proposed rule, and time for all interested parties to comment on the rule. This is followed by the agency reviewing all comments and formalizing a final rule. At the moment, without a public offering, company shares offered on crowdfunding platforms can only be subscribed by family, friends, and accredited investors – quite different than the structure for most of the European crowdfunding platforms.

Title IV, Small Company Capital Formation, is nicknamed “Reg A+” because it began as adaptations to the old Regulation A.  Title IV was sent to the Security and Exchange Commission (SEC) where rules were created following the administrative law procedures described above. These rules took effect last month. The rule is divided into two portions with varying levels of regulation on a variety of different investment capital. It allows for accredited and non-accredited investors to participate.  For more specific information, please see the rule or the official press release describing the rule, both are provided below.

While the new rules of title IV might ease many types of business creation, there are mixed opinions in the world of FinTech. Will the changed regulations cause a boom of new FinTech creation in the US market?
Some believe this is a game-changer for FinTechs because it allows people to invest regardless of accreditation, thus democratizing the creation of FinTechs.
Others argue that these rules make title III obsolete as title IV’s easier regulations will help crowdfunding platforms (regarding their business) as well as other kinds of FinTech (regarding their formation). However, some have commented that the regulations in title II are better, questioning if title IV will even be used.

Regardless, the new regulations will likely allow a greater number of startup FinTechs to receive instant financing money. While there may be fewer regulations to deal with in the financing and formation of a new FinTech, it is important for American FinTechs (and FinTechs from abroad coming to America) to remember that regulations still exist. These regulations could be on the local, state or federal level, and therefore some argue that FinTech companies should embrace the regulatory structure in order to succeed.
The rules of title IV have only recently become law and therefore it is much too soon to know what fewer regulations in business creation investment will mean for the FinTech industry.

Summary of New Rules
New Rule
Text of JOBS Act as of Mar 28, 2012

About the Author:
Elizabeth Williams is an American law student at Washington and Lee University School of Law. In the summer of 2015, she had an internship with P+P Pöllath + Partners in Frankfurt, and researched for two law professors.

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