CROWDFUNDING

Crowdfunding Start-ups Wait in Wings as SEC Stalls

The President signed the JOBS Act into law in April, fueling a boom in crowdfunding companies. But the SEC is stalling. What's the holdup?
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In an afternoon ceremony at the White House on April 5, 2012, President Obama signed off on the creation of the Jumpstart Our Business Startups Act, declaring that, with his signature, start-ups and small businesses will "now have access to a big new pool of American investors--namely the American people."

The bipartisan piece of legislation drew overwhelming support from around the country, but there's been one problem: Nothing has really happened yet.

At first, the Securities and Exchange Commission was given a 90-day deadline to implement the JOBS Act. To do so, regulators needed to rework the legal framework of the 1933 Securities Act to allow companies to raise money from investors without those companies registering financial information with the SEC. The SEC discussions have revolved around lifting the ban on "General Solicitation," which essentially defines the process by which a company can go out to raise money from investors.

Once the ban is removed, companies will no longer need to register their financial information with the SEC. This considered, it's not surprising that the SEC is taking its time.

What it comes down to is fairly simple: The SEC has been forced into a balancing act between allowing companies the freedom to raise funds from investors and protecting those investors (who, in some cases, for the first time won't be limited to professional investors) from potential fraudsters.

It's complicated, sure, but it's taking much longer than anyone anticipated. On June 28, 2012, SEC chairwoman Mary Schapiro admitted that meeting that 90-day deadline was "not feasible." A more realistic deadline, she said, was December 31. That deadline, too, has passed, leaving crowdfunding start-ups in the lurch.

Some have gotten creative while they wait. Crowdfunder, a Los Angeles-based start-up that launched in May 2012 in anticipation of the JOBS Act, now allows companies to float ideas for businesses, and lets users vote on whether they would--theoretically--invest in the company. EarlyShares, another crowdfunding platform, has used the time to embark on a tour of the United States that it's calling a "Nationwide Educational Roadshow."

But mostly, entrepreneurs are frustrated.

"The law was passed in April, and it had 90 days to be implemented," Rory Eakin, co-founder and COO of CircleUp, a San Francisco-based crowdfunding start-up that launched in 2011, told Inc. "It was due to be implemented in early July, and we're still waiting."

No one knows for sure when the SEC will iron out the details. Some predict that it will be the first quarter of 2014, at the earliest. But the SEC has apparently wisened up, realizing one fundamental truth: You can't miss a deadline that doesn't exist.

"We will continue working hard amid a busy rule-making agenda to get these crowdfunding rules done as soon as possible and to get them done right--with the appropriate investor protections in place," an SEC spokesman recently told The New York Times.

Last updated: Jan 8, 2013




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