Wednesday, November 4, 2015

Renewable Crowdfunding: New SEC Rule Could Increase Renewable Development

By Andrea Lang, Energy Fellow
Credit: SolarPlaza

Last Friday, the Securities Exchange Commission (SEC) finalized a rule to allow equity crowdfunding, which will go into effect on January 29, 2016.  Financing is one of the major hurdles to renewable development, because banks and other accredited investors may be wary of the risks involved in financing a renewable project.  The SEC’s new rule, which allows projects to receive a certain amount of investment through crowdfunding, may enable the development of more renewable energy projects that may otherwise have trouble finding investors.

Crowdfunding has become widely popular in the last several years, with companies or developers using sites like Kickstarter and Indiegogo to offer various rewards in return for funding projects. However, developers raising funds through these sites cannot currently sell debt or equity interests in the projects themselves. This is because under existing federal rules, equity offerings must go through a costly registration and reporting process with the SEC, or qualify for an exemption from the Security Act’s registration requirements. For example, offerings made exclusively to “accredited investors” may be exempt from securities registration requirements. Accredited investors include banks, investment companies, or people with a net worth of over one million dollars. Because most potential crowdfunding investors are not accredited, equity crowdfunding for renewable projects has been practically impossible. SEC rules also allow states to authorize wholly intrastate equity crowdfunding, but it is difficult for projects to meet the rules for the intrastate exemption in the states that do allow intrastate equity crowdfunding.

However, in 2012, the cleverly named Jumpstart Our Business Startups (JOBS) Act directed the SEC to develop a rule for a federal crowdfunding exemption to securities law. After delaying for several years, the SEC finalized this rule last Friday. The rule allows large numbers of less wealthy investors to invest a limited amount of money in return for a share in profits or revenues generated by the project – which is called “equity crowdfunding.” 

Obviously, the rule has huge implications for renewable projects, which have traditionally had trouble attracting accredited investors due to the perceived risk of such projects and their high costs. Because of the high amount of capital needed to finance these projects, the ability to raise capital through equity crowdfunding may enhance the ability of projects to get the financing they need to move forward. This is particularly true for small to medium-sized “community solar” projects, where neighbors that want to invest in a local renewable project likely don’t qualify as accredited investors and may not meet all of the requirements for the intrastate exemption.

Crowdfunding of renewable projects has been very successful in places that allow equity crowdfunding, such as the Netherlands. For example, the Netherlands-based renewable crowdfunding site deWindcentrale has raised about 15 million Euro for renewable projects since 2010. This huge potential source of financing won’t be completely new in the United States, since SEC rules did allow wholly intrastate equity crowdfunding in states that authorized it. In addition, crowdsourcing platforms such as Mosaic have been skirting the securities rules by acting as an intermediary between solar projects and crowdfunding investors so that investors earn a profit through Mosaic rather than owning an equity interest in the project itself, which would be illegal under the existing SEC rules. 

Now that the SEC has finally issued its regulation, platforms such as Mosaic and the newly launched  Gridshare have the potential to open new doors for renewable project finance, and hopefully connect more projects to the grid. 

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