The crowdfunding industry is frustrated that the Securities and Exchange Commission has not yet finalized rules that will potentially turbocharge the industry. But it is also cautiously optimistic that there will be movement this year.
The SEC is expected to finalize and implement rules on the provision of the Jumpstart Our Business Startups Act, known as the JOBS Act, which removes the ban on publically seeking investors by the end of June, according to Chance Barnett, the co-founder of Crowdfunder, a Venice, Calif.-based crowdfunding platform. Rules for the third component of the JOBS Act, which would make it possible to raise money on an online portal from non-accredited investors, are not expected until the third or fourth quarter of this year, Barnett says at a panel discussion in New York City Thursday.
Crowdfunding industry leaders have fresh confidence that the Commission is committed to finalizing rules passed by the JOBS Act. The SEC released a “no-action letter” to the startup-fundraising platform AngelList at the end of March. It also sent a similar letter to the online venture capital platform FundersClub the same week. In both cases, the SEC was indicating that it would not take action against either of the fundraising platforms for not meeting all of current regulations.
“I do feel confident, based on the two no-action letters that we just saw from the SEC,” Barnett says. The letters establish a change in precedent. “That is the first, real, legal implementation of general solicitation in our history, since it was banned in 1934.”
The JOBS Act was signed by President Obama one year ago today. The law, passed with broad bipartisan support, is a compendium of six pieces of legislation that are all aimed at increasing the ability of small businesses to access capital and generate jobs.
For several of the most popular provisions to be implemented, the law requires that the SEC write rules and regulations that simultaneously protect investors and encourage investment in startups. The Commission has missed deadlines established when the law was passed. The mandate to write rules for the JOBS Act provisions is a particularly complex task, and the SEC is in the midst of a leadership change, further bogging down the process. In January, President Obama nominated the former U.S. Attorney Mary Jo White to take the helm of the SEC for his second term.
The delay is irksome, but industry leaders are maintaining optimism. “I am frustrated, but I am not going to take that personally to the staffers at the SEC, who are actually really cooperative,” Barnett says. “It has been a little bit of a political football.”
The delay in the SEC rules has been hard on some crowdfunding platforms that tried to catch the wave of new fundraising made possible by the JOBS Act. Motaavi, a would-be equity crowdfunding platform, has had to shut down. But those crowdfunding platforms that already have investors of their own, like Crowdfunder.com, consumer-product platform CircleUp, and debt-focused platform SoMoLend, are expected to survive, Barnett says. “In some way, if it is more difficult for competitors, that’s kind of a good thing,” he says.
CircleUp co-founder Rory Eakin says that the delay in the implementation of the JOBS Act hasn’t stopped his platform from getting capital into the hands of qualified entrepreneurs. CircleUp is already connecting entrepreneurs with accredited investors through its online portal. When the JOBS Act rules are fully implemented, entrepreneurs will be able to raise more money faster, Eakin says.
“Currently, today, the small businesses that are raising capital on CircleUp are not allowed to inform their most passionate supporters,” says Eakin. “They have to offer it in an environment of silence. And so what it means is it is a slower, less efficient process.” When the JOBS Act rules are fully implemented, both investors and small-business owners will benefit, he says.