States Act on Crowdfunding While the SEC Dawdles

By SBE Council at 19 December, 2014, 10:13 am

by Raymond J. Keating-

The Obama administration shows great expertise when it comes to bureaucratic delays. That has been the case, for example, on the energy front when it comes to the Keystone XL Pipeline and LNG exports. The same issue persists with Obamacare, as there have been countless delays relating to regulations, and of course the SHOP exchanges for small businesses.

It’s also been the case with the Securities and Exchange Commission (SEC) establishing rules governing crowdfunding under the Jumpstart Our Business Startups (JOBS) Act. Final rules from the SEC regarding non-accredited investors (Title III crowdfunding) are long overdue. The JOBS Act, which made equity and debt-based crowdfunding legal was signed by President Obama in April 2012.

As Fortune.com reports, “The Securities and Exchange Commission is in no rush to finalize equity crowdfunding rules, despite having already missed its Congressionally-mandated deadline by around two years.” The rules were supposed to be issued in 2012. However, proposed rules were not served up until October 2013. Now, the SEC is looking at October 2015 to finalize its rulemaking, which means that rules would not go into effect until January 2016, at the earliest. For good measure, SEC Chairwoman Mary Jo White has said that there is no “drop dead date” to complete these rules. That’s a different story than what she told a U.S. Senate committee during her confirmation process, when she stated JOBS Act rules would be a “priority.”

(To read SBE Council’s comments on the proposed Title III crowdfunding rules, please click here.)

The implications of these delays are significant if we are serious about spurring entrepreneurship, innovation, economic growth and job creation. Consider the purpose of the crowdfunding law as summed up in a December 8 Entrepreneur.com article: “Under Title III of the JOBS Act, small businesses will eventually be allowed to use an online crowdfunding portal to sell equity in their business to the general public and to raise up to $1,000,000 in capital. Equity crowdfunding under the JOBS Act has been seen as a democratization of the startup and small-business investment process, and one which will put the ability of entrepreneurs to raise capital into the hands of ‘the crowd’ and not just wealthy investors, banks and Wall Street brokers.”

While the SEC continues to delay, there is action on intrastate crowdfunding in a variety of states. As noted in the just-published Small Business & Entrepreneurship Council’s Small Business Policy Index 2014: Ranking the States on Policy Measures and Costs Impacting Small Business and Entrepreneurship, 12 states – Alabama, Colorado, Georgia, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, Tennessee, Washington, and Wisconsin – have implemented some kind of intrastate crowdfunding laws.

For good measure, the American Legislative Exchange Council (ALEC) offers model state legislation for crowdfunding. The Local Investment Made Easy (LIME) Act is summed up this way: “The Local Investment Made Easy Act facilitates intrastate investment crowdfunding by creating an exemption in state securities law that allows for the crowdfunding of projects within the state. The Act also establishes protections for investors and the public through disclosure requirements, issuer caps and investment limits.”

So, while federal action is needed – specifically, for the SEC to issue final rules on crowdfunding, and to make sure those rules do not undercut this valuable avenue for small business to raise funds by being too onerous – various states are taking constructive action.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.