Entrepreneurs who have been waiting to take advantage of the Jumpstart Our Business Startups (or JOBS) Act may have to wait a little longer. The Securities and Exchange Commission continues to drag its heels on implementing the new law, which allows start-ups to find investors online via crowdfunding.
When Congress, in an almost unheard-of display of bipartisanship, passed the JOBS Act in April, crowdfunding seemed poised to boom. In 2011 alone, crowdfunding platforms helped raise about $1.5 billion for start-ups and other projects, according to Massolution, a research firm covering the space. Currently, the money raised on sites such as Kickstarter and Indiegogo is characterized as donations (for which donors are often offered rewards and opportunities to preorder products). The JOBS Act allows start-ups to potentially raise a lot more money online by using crowdfunding to sell equity in their companies.
Many crowdfunding sites have been cropping up to cash in on the new law. Once the JOBS Act rules are in place, at least 100 crowdfunding companies are expected to launch, says Kevin Berg Grell, who runs an accreditation program for the professional association Crowdsourcing.org. By the end of 2013, that number could double, he says. But these new companies have found themselves running headlong into a regulatory thicket.
Of course, the JOBS Act was supposed to do away with regulations--namely, those that were preventing entrepreneurs from offering shares in their companies via crowdfunding. For example, the SEC has long banned private companies from publicly soliciting investors, including on the Internet. There are also SEC rules that limit how many investors a private company may have before it is forced to register with the SEC, as a public company would.
But the SEC has been slow to indicate how it will implement the law. After it missed its original July 4 deadline, the commission finally issued some proposed guidelines in late August. Many details remain sketchy, however, and the SEC may not finalize its rules until the end of the year or early 2013.
One of the gray areas is the part of the JOBS Act that allows start-ups--which now must mainly limit their pitches to wealthy "accredited" investors--to cast a much wider net online. According to the act, investors making less than $100,000 a year will be able to invest up to 5 percent of their income in start-ups, and those making $100,000 or more will be allowed to invest up to 10 percent of their income. But will the SEC require crowdfunding sites to take steps to verify the income of these investors? It's still unclear.
Even with the act's regulations in place, there will probably be lingering questions about whether crowdfunding sites are serving merely as information portals or as securities broker-dealers that must register with federal regulators.
To put this in practical terms, Mike Norman, co-founder of Wefunder.com, a Boston-based start-up, asks what would happen if a crowdfunding portal highlighted "featured companies" on its homepage. Unless rules governing narrow situations like this one are clearly spelled out, it would be hard to determine whether a company was simply conveying information or giving investment advice, in which case it would have to register as a broker-dealer.
Because of this confusion, some crowdfunding sites are avoiding the new regulations altogether, at least for now. Kickstarter has said it won't change its business model to take advantage of the JOBS Act. And TheFundersClub.com, which lets people make small investments in some Y Combinator companies, is limiting its users to the wealthy accredited investors who were able to invest before the JOBS Act passed.
Crowdfunder, a Los Angeles-based start-up, took a similar tack in August, when it announced that it had formed a strategic alliance with GATE Global Impact, a registered broker-dealer, to allow accredited investors to make investments in companies registered on the Crowdfunder site.
Despite the uncertainty, most crowdfunding start-ups are pressing on. Wefunder has already registered more than 8,000 investors, and Crowdfunder has about 9,000. Still, D.J. Paul, co-founder of Crowdfunder, thinks there will be some cooling of the initial crowdfunding enthusiasm once companies fully understand the regulatory requirements involved: "A lot of people thought crowdfunding would be more like eBay than Merrill Lynch." Increasingly, Paul says, they are discovering that that's not the case.