Entrepreneurs’ regulatory concerns start (but don’t end) with crowdfunding rules


The first phase of equity crowdfunding implementation could begin as early as April, depending on the level of priority it’s given by incoming SEC Chair Mary Jo White, according to crowdfunder.com CEO Chance Barnett. (KEVIN DIETSCH / POOL/EPA)
February 6, 2013

Entrepreneurs and their young businesses have the potential to accelerate the national economic recovery this year, but only if they get a little help from federal regulators, according to a number of start-up founders, investors and researchers who spoke at a policy event on Tuesday in Washington.

And for the most part, their plea to regulators was succinct: Just get out of the way.

“The spirit of the JOBS Act was to encourage innovation and expand the experimental platform of crowdfunding, and its successes or failures should be determined in the marketplace, not by regulators,” Kauffman Foundation chief executive Tom McDonnell said during his group’s annual State of Entrepreneurship address, highlighting one of many opportunities he says the federal government has this year to remove financial barriers for entrepreneurs and encourage growth and hiring by early-stage businesses.

In the case of the Jumpstart Our Business Startups Act, entrepreneurs are growing increasingly concerned in the wake of missed deadlines by the Securities and Exchange Commission, which by the end of last year was supposed to issue new rules that would allow businesses to sell equity stakes through “crowdfunding” platforms authorized by the legislation. But as the wait continues, many are worried that regulators will water down the impact of the law by providing too many investor protections.

“I’m frustrated with the pace,” Alan Patricof, founder and managing director of Greycroft Partners, a venture capital firm based in New York and Los Angeles, said during the event. “The SEC has delayed implementation for lots of people who would like to take action, and they are getting frustrated and frustrated and more frustrated by the fact that the rules have not come out. This is not rocket science, and I think there is so much concern about the harm it could do, that they are losing sight of the good it could do.”

The potential for harm, Patricof later acknowledged, is very real, as less experienced investors jump online to evaluate equity deals that may or may not come from legitimate business ventures. Already, a number of real estate investment scams and other fraudulent entities have been discovered on crowdfunding platforms.

Neverthesless, he predicted “the fraction of people that will be dishonest will pale in comparison to the number of honest, hard-working, worth-while businesses that will get started.”

Citing recent discussions with SEC officials, Chance Barnett, CEO of crowdfunder.com, says he expects the agency to issue rules allowing only accredited investors to begin using crowdfunding portals as early as April or May, depending on the level of priority it’s given by incoming SEC Chief Mary Jo White. But it could be much longer before broadbased crowdfunding becomes available to the public and can reach its full economic potential.

But there are several steps regulators can take in the meantime to free up more capital and catalyze start-up growth, Kauffman officials say. They urged policy makers to consider making changes to the public offering process, including adopting an auction model for initial public offerings, which they believe would make the process more transparent and encourage participation from a wider base of investors, and allowing shareholders to decide whether public companies of all sizes must comply with the financial reporting requirements of Sarbanes-Oxley (the JOBS Act only exempted small public firms).

They also called on the Federal Reserve and the Federal Deposit Insurance Corp. to abandon their current “one-size-fits-all” approach to lending guidance that doesn’t always take into consideration the unique role of small, local banks, who they say “remain a critical source of loans for young and small businesses.”

Follow On Small Business and J.D. Harrison .

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.
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