Saturday, November 24, 2012

The crowdfunding mess: How delays in regulation can ruin even a good law

Sometimes, the government can take so long to issue regulations that a law that is intended to facilitate enterprise in fact frustrates it. From the current issue of Inc Magazine ("The SEC stalls entrepreneurs hoping to cash in on the JOBS Act."):

Entrepreneurs who have been waiting to take advantage of the Jumpstart Our Business Startups (or JOBS) Act may have to wait a little longer. The Securities and Exchange Commission continues to drag its heels on implementing the new law, which allows start-ups to find investors online via crowdfunding.

When Congress, in an almost unheard-of display of bipartisanship, passed the JOBS Act in April, crowdfunding seemed poised to boom. In 2011 alone, crowdfunding platforms helped raise about $1.5 billion for start-ups and other projects, according to Massolution, a research firm covering the space. Currently, the money raised on sites such as Kickstarter and Indie­gogo is characterized as donations (for which donors are often offered rewards and opportunities to preorder products). The JOBS Act allows start-ups to potentially raise a lot more money online by using crowdfunding to sell equity in their companies....

But the SEC has been slow to indicate how it will implement the law. After it missed its original July 4 deadline, the commission finally issued some proposed guidelines in late August. Many details remain sketchy, however, and the SEC may not finalize its rules until the end of the year or early 2013....

Because of this confusion, some crowdfunding sites are avoiding the new regulations altogether, at least for now. Kickstarter has said it won't change its business model to take advantage of the JOBS Act. And, which lets people make small investments in some Y Combinator companies, is limiting its users to the wealthy accredited investors who were able to invest before the JOBS Act passed. (emphasis added)

In other words, the United States Congress actually passed a useful law that would have allowed entrepreneurs to use social networking techniques to fund start-ups, and President Obama ran a victory lap for the law during the campaign. But yet... no regs, so no new start-ups (and, we observe with at least a little tart, little mention of that fact from the mainstream media).

Sadly, the regulatory agencies can, and often do, kill new businesses in the crib by doing nothing, even when doing nothing includes blowing off Congressionally-mandated deadlines for producing enabling regulations.


  1. Don't forget enabling regulations for the public advertising part of the JOBS Act. According to the act, you can now publicly advertise private placements under Rule 506 of Regulation D, provided all the investors you sign up are accredited (which, you will note, no longer includes home equity in its definition). The SEC will promulgate rules as to how these new offerings will determine an investor is accredited, most likely eliminating self-reporting as an acceptable safe harbor. My belief is that the SEC is in bed with Wall Street brokerage houses, with whom private placements compete. Hence, I believe that to benefit Wall Street these rules will be long in coming, unnecessarily delaying (and possibly halting due to that delay) offerings, and they will be so restrictive as to render the new exemptions difficult or impossible to comply with. Or, very likely, no investor will want to comply with, which amounts to the same thing.

    The various state securities regulators will likely petition the SEC to end up with a worthless exemption as well, since they are notorious for being against private placements in general, and despise the fact that rule 506 offerings are exempt from their regulatory purview. They will not be happy with an expansion of rule 506.

    Note that there are many exemptions other than 506, but they are rarely used, precisely because the implementing regulations render what are, on their face, desirable and useful rules into useless wastes of print.

  2. All good points, randian. Thank you for the contribution.


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