When Congress approved the Jumpstart Our Business Startups Act in the summer of 2012, it gave the Securities and Exchange Commission until the end of that year to issue rules allowing entrepreneurs to start raising small amounts of capital from mom-and-pop investors through new online crowdfunding sites.
But 2012 turned to 2013. Still no rules, not even a proposal.
Then 2013 turned to 2014, with proposed rules on the table, but nothing final.
Now, as we approach the end of 2014, SEC officials say that the final rules aren’t likely coming this year either, fueling frustration from lawmakers, investors and entrepreneurs.
During a forum at the agency on Wednesday, Tim White, the department’s special counsel on trading and markets, noted that SEC Chair Mary Jo White has more than once said the rules are “a priority of hers” and that she had hoped to issue final regulations by the end of the year. “Obviously, it’s mid-November,” White said. “So, unless the chair puts it on the schedule soon, it’s not going to happen this year.”
“When it will happen, I really can’t estimate at all,” he added.
Under the crowdfunding provision of the law, which was one of several major changes to longstanding securities laws, companies are permitted to raise up to a million dollars from the public through new online funding portals. For the time being, entrepreneurs can offer equity deals through the portals only to accredited investors; others can contribute to crowdfunding campaigns only in exchange for gifts, not an equity stake in the venture.
For the SEC, the challenge in drafting the specific rules has been striking the right balance between protecting non-accredited (often less wealthy and less seasoned) investors from shady offerings, while still stripping away barriers to capital for entrepreneurs. When the rules were proposed last fall, hundreds of comments started arriving from interested parties — and they are still coming in.
“The comment period did have an end date, but we continue to receive comments,” White said, noting that roughly 40 letters came in last month alone, and that the agency will continue taking them until final rules are published.
“In terms of the hold up, it’s just a process and we’re working through that process,” he said, later insisting that rumors that the agency doesn’t approve of the crowdfunding concept and is deliberately slowing the process are unfounded. “Honestly, we’re working very hard on it.”
The delays are starting to weigh on entrepreneurs, though, including those looking to raise money on equity crowdfunding portals as well as those actually running the portals.
Ron Miller, the chief executive of StartEngine Crowdfunding, one such portal based in California, said during the event that dozens of firms that built crowdfunding sites or that were set up to help small businesses navigate the process have gone out of business waiting for the SEC’s long-overdue green light.
“Unfortunately, businesses failing and starting is a natural cycle,” replied Pravina Raghavan, the Small Business Administration’s deputy associate administrator for innovation and technology. “When you’re looking at an industry that’s trying to burgeon onto something that’s not out, that’s just a risk some entrepreneurs take.”
A number of lawmakers on the Hill are starting to pressure the agency to speed up the process, too. Sen. Mark Warner (D-Va.), for example, sent a letter to White in September saying that “crowdfunding will unleash new growth opportunities for entrepreneurs,” particularly in areas where start-up capital has been scarce.
“I urge you to find a solution quickly so as not to hold up this important tool,” Warner wrote in the letter. “Two years after the passage of the JOBS Act, it is time for crowdfunding rules to be in place to provide clarity for market participants and support the economic activity we both believe will follow.”
One month earlier, Jason Best and Sherwood Neiss, the founders of advisory and education firm Crowdfund Capital Advisors, sent a similar letter to White, warning that further delays would not only handicap individual entrepreneurs, but also give other nations a leg up over the United States.
“We are concerned that the current situation leaves America at a competitive disadvantage,” they wrote, noting that other countries with heavily regulated financial markets — including the United Kingdom, Australia and France — already legalized various forms of non-accredited equity crowdfunding. Those nations have, as Best and Neiss write, “already beaten us to the starting line.”
Even some of the SEC’s commissioners are growing anxious at this point.
“These rules arise from laws passed two and a half years ago, and Congress is looking to us to get them done,” SEC Commissioner Kara M. Stein said during an event on small business capital formation on Thursday. “Quite frankly, I don’t think we’re very far away on some of these rules. Let’s get them done.”