Quickly adapting to crowdfunding laws


Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, pictured in 2011. The SEC announced its proposal to relax the ban on general solicitation last week. (Joshua Roberts/Bloomberg)

The Securities and Exchange Commission is proceeding slowly as it draws up rules for equity-based crowdfunding — a not-yet-legal practice that would allow companies to offer stakes to large groups of small investors.

The agency, which has already missed two deadlines for offering rules, last week took a tiny step forward.

The SEC proposed to lift the advertising ban on those who would offer shares to accredited investors — this includes people who make more than $200,000 a year or who have over $1 million in net worth.

The proposed rule would just permit advertising, not allow the actual sale of a stake. And little has been said yet about when the non-accredited masses can participate.

It’s all part of the SEC’s deliberative, stepwise approach, said DJ Paul, co-founder and chief strategy officer of a company that calls itself crowdfunder.

After seeking public comment on the proposed rules for 30 days and then reviewing the comments, the SEC will decide whether to formally lift the advertising ban. In the meantime, some businesses are trying to anticipate the agency’s next move.

Shortly after the SEC made its proposal last week, crowdfunder announced an alliance with an existing broker-dealer, New York-based GATE Global Impact, to pursue securities-based crowdfunding between U.S. business owners and accredited investors.

While waiting for SEC regulations to be released, crowdfunder had been building a virtual community of 9,000 investors and entrepreneurs and 1,100 registered companies looking both to invest in and fund start-up businesses. Leveraging crowdfunder’s existing network, GATE’s broker/dealer division will facilitate the securities-based transactions between investors and companies.

“I believe the crowdfunding solution at least for the coming months is a broker/dealer solution, not an intermediary solution,” Paul said, because broker/dealers already have the mechanisms in place to verify an investor’s background and protect their security.

Though he believes this is the first step towards “proper” crowd-funding, Paul said he thinks “this version of crowdfunding is a far cry from what most startups are expecting.”

Many startups entering the industry are hoping to be able easily sell shares to the general public without a broker/dealer, he said. They also likely expected to be able to sell to both accredited and non-accredited investors immediately.

“Maybe some day, people or portals will be able to...facilitate transactions as we imagined, but in the meantime, the economy can’t wait,” Paul said.

Successful crowdfunding platforms will be those who are nimble and willing to pursue partnerships with established financial entities, he predicted.

Mohana Ravindranath covers IT and small business for the Washington Post and its weekly Capital Business publication.
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