When the JOBS Act was signed into law by President Obama on April 25, 2012, the idea was to have both kinds of Crowdfunding up and running by January 1, 2013:
- The “real,” broad-based Crowdfunding, which allows companies to raise up to $1 million from large numbers of investors of any income level; and
- The “Rule 506” Crowdfunding, which allows companies to raise money from accredited investors using general solicitation.
Yet neither kind of Crowdfunding is available now, and neither is likely to be available on January 1st.
The bottleneck is at the Securities Exchange Commission. The JOBS Act established the basic Crowdfunding rules but left it to the SEC to work out the details. So far, the SEC has proposed rules for Rule 506 Crowdfunding but has not yet finalized those rules, and has not yet even proposed rules for the real, broad-based Crowdfunding.
Apart from a lack of manpower, the reason for the delays can be seen from the reaction to the rules the SEC proposed for Rule 506 Crowdfunding. As reported in this blog, the proposed rules did not draw clear lines, instead leaving it to companies and ultimately the courts to establish what was reasonable. The lack of specificity left many people unhappy, including a group of Senators that excoriated the SEC publicly for the lack of guidance and accused the rule-makers of failing to protect the investing public.
Congress passed to the buck to the SEC, but now the SEC isn’t sure what Congress wanted. It’s a very tough bind for the regulators.
And if Rule 506 Crowdfunding presents tough issues for the SEC, they are child’s play compared to the issues that arise from broad-based Crowdfunding, where the investing public, by definition, needs much greater protection than accredited investors.
There is no definite word as to when the SEC will finalize the rules for Rule 506 Crowdfunding or even propose rules for broad-based Crowdfunding. Meanwhile, companies wanting to raise money, portals wanting to help them raise money, and investors wanting to invest are like travelers at the airport seeing “Delayed” on the overhead screen. Nobody can do anything until the SEC acts.
Questions? Contact Mark Roderick at Flaster/Greenberg P.C.