From Prohibition to Progress: Opening Doors for Social Enterprises Through Crowd Investing

The Great Depression of the 1930s sent shockwaves throughout the global economy, prompting governments worldwide to implement stringent regulations to prevent a similar economic collapse. While these regulations were necessary to restore stability, they inadvertently created barriers for community organizations and social enterprises seeking funding.

Fortunately, recent regulatory developments, such as Regulation A+ and Regulation Crowdfunding, have emerged as beacons of hope, opening doors for public funding and empowering social enterprises that, like any other business, need capital to operate, grow and scale their impact.

Historical Barriers for Community Organizations and Social Enterprises

Following the Great Depression of 1929, the Securities and Exchange Commission put regulations in place to protect investors, primarily through the Securities Act of 1933 and the Securities Exchange Act of 1934. While these regulations played a crucial role in restoring confidence in financial markets, they also created challenges for community organizations and social enterprises. The stringent requirements, such as the need for audited financial statements and costly registration processes, became significant barriers for these organizations in seeking funding.

The regulations were primarily designed to safeguard investors by ensuring transparency and preventing fraudulent activities. However, the unintended consequence was unaffordable compliance costs for most social enterprises. Consequently, these organizations could not access public funding channels, limiting their ability to scale and address critical social challenges.

Regulation A+ and Regulation Crowdfunding: Opening Doors

Recognizing the need to address these challenges, regulatory authorities more recently introduced a couple of innovative frameworks to make it easier for social enterprises to raise funds from the public. Regulation A+ and Regulation Crowdfunding are two significant breakthroughs in this regard.

Regulation A+, implemented under Title IV of the Jumpstart Our Business Startups (JOBS) Act in 2015, allows social enterprises to raise up to $50 million from either accredited or non-accredited investors. (An accredited investor is financially knowledgeable enough to look after their own investing activities without SEC protection. An accredited investor can be a wealthy individual, but is more commonly understood as a bank or financial institution. A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the SEC. These are defined by the SEC as anyone making less than $200,000 annually (less than $300,000 including a spouse) that also has a total net worth of less than $1 million when their primary residence is excluded. Investopedia)

So, Regulation A+ streamlines the registration and reporting requirements, making it easier for small enterprises to navigate the fundraising process. This kind of fundraising can bridge the gap between private funding and full-scale public offerings, allowing community organizations and social enterprises to access capital while complying with investor protection measures.

Regulation Crowdfunding, subsequently established under the JOBS Act in 2016, revolutionized the fundraising landscape by enabling social enterprises to raise smaller amounts from a larger pool of investors through online crowdinvesting platforms. This democratized approach empowers organizations to engage their communities directly. It provides an opportunity for individuals to contribute financially to causes they believe in. Regulation Crowdfunding has emerged as a powerful tool, fostering innovation and supporting the growth of social enterprises.

Ways to Improve Current Crowdfunding Regulations

While Regulation A+ and Regulation Crowdfunding have significantly opened up public funding opportunities for community organizations and social enterprises, there is always room for improvement. Here are a few potential areas where regulatory authorities could enhance the effectiveness of these frameworks:

  1. Increased Funding Caps: Considering the rising costs of implementing impactful social initiatives, raising the funding caps under Regulation A+ could enable social enterprises to pursue larger-scale projects and reach more communities in need.
  2. Streamlined Compliance Procedures: Further simplifying and streamlining the compliance requirements under both regulations can further reduce the burden on social enterprises. Enhancing user-friendly documentation, providing more explicit guidelines, and offering educational resources would encourage more organizations to leverage these funding opportunities.
  3. Investor Education: To ensure a sustainable and responsible flow of capital, regulatory bodies could invest more in educating investors about the potential risks and rewards associated with investing in community organizations and social enterprises. Educated investors will make more informed decisions and contribute more decisively to the longevity of these ventures.
  4. International Harmonization: Exploring opportunities for international harmonization of regulations could foster cross-border investment in social enterprises. Harmonizing regulations across different jurisdictions would facilitate global fundraising efforts and encourage collaborations among social enterprises worldwide.

As we move forward, regulatory bodies, social entrepreneurs, investors, and communities must work collaboratively to create an enabling environment that supports the growth and sustainability of community organizations and social enterprises. By addressing regulatory limitations and embracing innovative solutions, we can pave the way for a future where these enterprises thrive, creating positive social change and driving inclusive economic development.

The historical journey from prohibition to progress has taught us valuable lessons about the need for adaptive regulations — regulations that strike a balance between investor protection and the empowerment of social enterprises. By continuing to refine and improve these regulations, we can unlock the full potential of social enterprises and build a more equitable and compassionate world.

Paul Lovejoy is an activist investment advisor at Stakeholder Enterprise. His mission is to empower regular working people to fix our broken financial system through crowd investing one client at a time.