Emerging Markets Law

When Will the SEC Act on Crowdfunding?

One of the most frequent questions I am asked is, “When will the SEC issue regulations to make crowdfunding possible?”

I have no idea what the SEC’s internal deliberations are, but an in-house lawyer blog (TheCorporateCounsel.net) caused a bit of a panic last week in an article   that speculated that crowdfunding regulations wouldn’t be finalized until late 2014:

“As this Washington Post article notes, the SEC Staff has indicated that crowdfunding rules can be expected sometime this fall, however these would presumably be proposed rules, meaning that final rules could not be expected until well into 2014 at the earliest when you factor in the need for FINRA to also create a regulatory system for funding portals. As a result, the ability to do exempt crowdfunding offerings remains limited, except that many are anticipating the ability to do more accredited investor-only crowdfunding offerings once general solicitation is permitted under Rule 506 after the September 23, 2013 effective date of those JOBS Act mandated rule changes.”

While this is persuasive reasoning, some of the crowdfunding insiders I spoke to reached different conclusions.  While it takes time for the issue to issue proposed regulations, absorb comments and then finalize rules, much of that process has already been ongoing, some professionals will argue.

I tend to be pessimistic when it comes to government’s ability to do things.  Any proposed SEC rules on crowdfunding will draw fire from all sides.  Some commenters will argue that the rules are too restrictive and will slow down fundraising.  Others will argue that the rules are too loose and will permit too much fraud.  Whatever position the SEC ultimately takes will almost certainly require a companion rule-making on the part of FINRA, as FINRA will be the self-regulatory organization (“SRO”) anointed by the SEC to managing the licensing process for crowdfunding portals.

As my colleague Dianne Trenholm pointed out in a recent online discussion, FINRA’s licensing process for broker-dealers can often take seven or eight months, from the collecting of documents to fielding questions from FINRA examiners.  Because the crowdfunding portal licensing process will be new and untested, it would not be unreasonable to expect that it would take just as long.

In addition, the SEC is also facing deadlines to complete rule-makings relating to Dodd-Frank and a new rule-making regarding market stability as a result of the recent NASDAQ outage.

So, to speculate further, let’s imagine the SEC issues proposed rules in October, 2013 (which some would say is optimistic).  The SEC will give 60 days for comment, running to the end of 2013.  Assuming a brief 45-days interim period before issuing final rules in February, 2014, FINRA might be able to announce its own rules 90 days later, in May or June of 2014.  If that happened the earliest that FINRA would authorize anyone to

act as a crowdfund portal would be no sooner than the third quarter (or more likely the fourth quarter) of 2014.

Again, this is nothing but educated speculation but if you think the process will wind up sooner than that I would love to hear how that’s going to happen.

And now some editorializing.

How sad and pathetic it is that a Congressional action, adopted by a bipartisan majority in both houses of Congress in April 2012 and signed by the President days later, takes more than two years to implement.  The whole idea behind the JOBS Act was to “jump-start” the employment market by dramatically accelerating the ability of start-ups and small businesses to raise funds.  It seems that even when our political parties come together in agreement to take swift action the bureaucratic arm of government conspires to slow the process down to a glacial speed.  Regardless of what you might think of crowdfunding, the SEC’s administration of the JOBS Act is a stark illustration of the power of the federal government’s massive bureaucracy to work its will despite the announced will of the elected government.

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