Ever since President Obama signed the Jumpstart Our Business Startups Act in April, entrepreneurs and investors have been buzzing about the promise of new paths to start-up capital. But the clock is ticking for the regulators charged with implementing the law, and with little more than a month left before their deadline, several key questions remain unanswered.
“There’s a lot of work left to be done,” Gregory C. Yadley, partner at Shumaker, Loop & Kendrick in Tampa said during a Washington forum at the Securities and Exchange Commission last week. “The law is better than it might have been … but there are lots of loose ends, a lot of inconsistencies.”
The JOBS Act gave the Securities and Exchange Commission until Dec. 31 to determine how to implement and enforce new rules allowing entrepreneurs to raise up to $1 million in equity through online crowdfunding platforms. The platforms are intended to help start-ups secure small amounts of capital from investors without the costs and time required to register with the SEC.
However, the agency still must determine which rules will give entrepreneurs access to as many potential investors as possible without sacrificing the protections meant to help people avoid fraudulent propositions. For instance, regulators are still working on ways to ensure investors are educated on how to evaluate crowdfunding proposals, and how to monitor the amount of money investors are pouring into companies through online portals (the law places a tiered cap on crowdfunding investments based on an investor’s income).
There is also a great deal of uncertainly concerning the standards for “registered funding platforms.”
“There are folks that think a crowdfunding portal is just a notice board placed in the middle of the village green, where you put notices for a missing cat, securities for sale, and that’s all,” Sara Hanks, chief executive and co-founder of CrowdCheck in Alexandria, said during the forum Nov. 15, later adding that many of the teams behind today’s crowdfunding platforms don’t seem to realize that “they’ve entered the most regulated industry in the history of anywhere in the universe.”
Meanwhile, the SEC rules aren’t the last remaining hurdle. The JOBS Act also requires the Financial Industry Regulatory Authority, a nongovernmental organization that regulates brokerage firms and exchange markets, to implement a new set of rules specifically for crowdfunding portals.
One big problem: The law set no deadline for FINRA, which according to Tim Rowe, chief executive and founder of the Cambridge Innovation Center in Cambridge, Mass., often “moves at a snail’s pace.”
“There is this boogey man that none of us realized would be a big deal at the time when the law was passed, but it’s now clear that this could take a long time,” he said in an interview, noting that crowdfunding will remain illegal until the group publishes its own set of standards. “They’re a complete wild card.”
FINRA isn’t likely to start drafting those until the government issues its own rules, Rowe added, noting that the SEC then must review and approve the rules proposed by FINRA.
That could mean an additional year or so after the SEC publishes its own rules before crowdfunding is available to entrepreneurs. “We’re ready for a good long wait,” Rowe said.