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Crowdfunding: SEC to Miss Deadline for JOBS Act Rules

Crowdfunding: SEC to Miss Deadline for JOBS Act Rules

My readers will recall that back in May 2012, I wrote about the JOBS Act and its revolutionary crowdfunding provisions. This new law promises to make a new source of funding available to startups and potentially create whole new industries. Unfortunately, this can’t happen until the rules are laid down, and it looks like the SEC is not going to meet its legally-mandated deadline.

To recap some of the key points about the JOBS Act and its crowdfunding provision:

The Act is intended to encourage funding for small businesses by making it easier for certain small businesses to comply with securities regulations (or bypass certain regulations entirely.) Title III of the Act, known as Crowdfunding, amends Section 4 of the Securities Act to create a new exemption for offerings of “crowdfunded” securities. It will exempt issuers from the requirements of Section 5 of the Act when they offer and sell $1 million or less in securities, don’t exceed certain thresholds and meet certain other conditions. The bill allows startup companies to  turn to online investors to raise much-sought-after startup capital — similar to how websites such as Kickstarter let users raise money for films, books, or other projects. Furthermore, the investors can be non-accredited investors (your everyday Jon and Jane Smith – an accredited investor can roughly be translated as “a wealthy person with money to burn”). Essentially, the JOBS Act allows websites to help everyday investors contribute small amounts of capital to for-profit business projects that they read about online. This allows projects that might otherwise have difficulty finding big time investors to raise money more quickly and efficiently.

“Great,” you say, “so how do I start using crowdfunding to raise capital for my business?” Not so fast.

The Act gave the Securities and Exchange Commission (SEC) 270 days to create rules of the road for crowdfunding. Until those rules are adopted, crowdfunding in this sense remains illegal. Since the Act was signed into law on April 5, 2012, the 270 day deadline is…December 31, 2012.

OK, so we’ve just got a few more days to go, right? Well, the New York Times is reporting that the SEC is unlikely to meet the 12/31/12 deadline. In fact, there is no indication of when these rules might be put forward.

The SEC is currently in a transition phase, as its director, Mary Schapiro, stepped down on December 14. Various court rulings have also slowed down the SEC’s rulemaking process in general. There is some fear that the rules may not appear until 2014.

Crowdfunding for businesses may sound like a no-brainer, but there are several sticky issues to work through. The SEC is trying to make the system as smooth as possible for businesses while still providing an adequate level of protection for investors. Remember, the investors in these cases will not necessarily be wealthy or seasoned. The Act was intended to allow everyday people to participate in funding for startups.

One key issue is whether or not businesses are required to have audited financial statements. The Act provides that any company raising over $500,000 must go through just such an audit. However, it’s not common for small startups to have their financials audited, and this step may be too burdensome or costly for a small business. The SEC has the power to adjust the $500,000 threshold, but people on all sides of the issue are split on where the line should be. The rules should not be so strict that it would be impossible for most small businesses to participate – if that’s the end result, then the law would be a waste of time and money. But there is a real danger of everyday investors losing their savings due to fraud or honest misunderstanding of the risks involved. Perhaps we shouldn’t be surprised that the SEC hasn’t been able to untangle this mess in only nine months.

Until we hear something new from the SEC, plans for startups to sell equity through crowdfunding remain on hold. Hey, at least we don’t have a fiscal cliff to worry about, right?

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