On April 5, 2012, a revolutionary avenue of capital formation for small businesses was created when President Obama signed The JOBS Act into law and equity crowdfunding in the United States was born. Entrepreneurs with small businesses were excited by the prospect of using online crowdfunding to raise up to $1 million by selling equity in their company, something not allowed on rewards-based crowdfunding sites Kickstarter or Indiegogo. When the JOBS Act was passed, the new law gave the Securities and Exchange Commission until January 1, 2013 to publish regulations and rules that would allow this game-changing law to go into effect.
Almost three years later, the SEC still has not published the final rules, and JOBS Act equity crowdfunding remains on hold. How is this possible?
I spoke to Kendall Almerico, one of the top crowdfunding and JOBS Act lawyers in the country, after he finished his keynote speech at the Global Crowdfunding Convention and Bootcamp in Las Vegas. Kendall is just as perplexed as everyone else that the SEC has not finalized the rules that the JOBS Act itself required them to publish more than two years ago.
“If a law said you or I had to do something by a certain date, we would do it because we do not want to face criminal or civil penalties for not complying with the law,” Almerico says. “But the SEC is different. There is no real means to hold them accountable for not doing what the law says, so they can take their time and release the JOBS Act rules whenever they are ready.”
Congress passed the JOBS Act with overwhelmingly bipartisan support. Despite the bitter partisan fights going on in Washington DC, both parties strongly supported the use of online equity crowdfunding portals to help fill the small business funding problem that has existed since banks tightened up lending money to young businesses. Equity crowdfunding under the JOBS Act puts the funding of new and emerging businesses into the hands of the general public and takes it away from banks, wealthy investors and Wall Street. But none of it can happen without the SEC rules being released.
The SEC did release an initial set of proposed equity crowdfunding rules in October 2013 – 585 pages of them. But these rules have not been finalized and made into law, so nobody can use JOBS Act equity crowdfunding yet. Some have criticized the SEC for overly complicating a fairly straight-forward nine page law with so many proposed rules, but we must remember that the JOBS Act created entirely new methods of selling securities and overturned 80 year-old securities laws and decades of legal precedent. Because the SEC has to regulate what happens with this new class of capital formation, protect investors from fraud and enforce the laws against those who misuse it, they need to be very cautious and make sure the rules they pass get it right the first time.
So when will the final SEC rules come out and allow start-ups and small businesses to use this amazing tool to raise funds? Almerico says it could be another year before the SEC acts.
“The Securities and Exchange Commission released a rulemaking agenda placing the equity crowdfunding rules on their October 2015 agenda,” Almerico says. “Even after they are finally released, it takes 60 days to published them in the federal register before they become law. Looks like the earliest we will have JOBS Act equity crowdfunding will be in 2016.”
Despite the cynicism, some rumblings from the SEC give me hope that the rules may be released sooner than that. SEC Chair Mary Jo White has publicly stated they she will be pushing forward “in the near term” to finalize the remaining JOBS Act mandates.
Let’s hope that “near term” means sooner, rather than later. Entrepreneurs need this law and the unprecedented ability to raise capital that it will bring to the small business economy.