When President Obama signed the Jumpstart Our Business Startups Act in early April 2012, most people thought that equity crowdfunding — in which investors expect a return on their investment — would be up and running by now. Many equity crowdfunding websites sprung up and several equity crowdfunding conferences were held in anticipation of its establishment. But first the Securities and Exchange Commission (SEC) had to write implementing rules, and although they had a 270 day period to write them, those 270 days have long passed and there are still no governing regulations.
Rather than sit idle, equity crowdfunding platform owners are partnering with licensed broker-dealers who serve the traditional “accredited investors” (those with a net worth of over $1 milling or income over $200,000 for the previous two years). They are using their platforms to fund projects with money from traditional investors. In contrast, the new law allows individuals with an income of less than $100,000 per year to invest the greater of $2,000 or five percent of their income per year. Individuals with an income of more than $100,000 can invest up to ten percent of income, with a maximum of $100,000 per year. But companies can raise no more than $1million a year via equity crowdfunding. No limits exist on funding from accredited investors.
Why the delay?
Although the SEC says that the delay in promulgating rules is because it wants to ensure that potential equity crowdfunding investors are protected from fraud, the SEC (and VC firms) have voiced the opinion that non-accredited individuals have no place in the risky world of investments. So the SEC is dragging its feet on writing the regulations.
But this law was passed by Congress, with bi-partisan support, and signed by the President. The SEC has no legal right to prevent its implementation. In the United States, we let people who are not wealthy engage in all kinds of risky financial behavior — gambling and day trading for instance — without restrictions. Many wealthy individuals have become even richer by investing in the right start-ups. Middle class individuals have been excluded from participating in start-up funding and in initial public offerings (IPOs), which are dominated by institutional investors.
Furthermore, the delay in equity crowdfunding is particularly problematic because other funding sources are not readily accessible. Bank loans for start-ups and small businesses, which often contain onerous conditions such as requiring that residential property be put up as collateral, dried up several years ago.
The current thinking is that the SEC will publish crowdfunding rules sometime between September and December. Because there is a public comment period, it is unlikely that equity crowdfunding will become a reality before 2014. However, for those who want to try it, donation-based crowdfunding is alive and prospering.