Four hundred days ago Friday, everyday individuals gained the opportunity to invest in startups through the “crowdfunding” provisions of the JOBS Act. However, 125 days ago, federal securities regulators failed to meet a deadline to clarify how these rights would be implemented, casting doubt on whether any crowdfunding will materialize before the middle of next year.
This delay has left a growing number of entrepreneurs and investors increasingly frustrated as they seek to take advantage of this new investment avenue. Aspiring crowdfunders express that they are exhausting time and resources while waiting on the Securities and Exchange Commission (SEC) to act.
Many stakeholders believe that if the SEC were diligently working on regulations to prevent fraud and investment bubbles, it would be more understandable. Instead, turnover in leadership has delayed the release of rules that officials drafted five months ago, which were expected to be announced before the end of last year in accordance with the JOBS Act.
“It’s not bitterness; it’s more about frustration,” remarks Candace Klein, founder of the crowdfunding platform Somolend and former chair of the Crowdfunding Intermediary Regulatory Advocates. “Several of us raised capital based on that timeline, and now we must explain to shareholders why there has been no progress, which puts us in a difficult position.”
Klein, who maintains regular communication with SEC staff, indicates that regulations were prepared at the beginning of November but have remained untouched on the desks of the commissioners. Mary Schapiro, who resigned in December after four years as SEC chairman, was perceived as unsupportive of the crowdfunding components of the JOBS Act. Her successor, Elisse Walter, similarly failed to gain trust. Recently sworn-in Mary Jo White, a former federal prosecutor and Wall Street attorney, is anticipated to tilt the five-member commission in favor of crowdfunding initiatives alongside her Republican counterparts.
“Mary Schapiro would never have approved it,” states Sherwood Neiss, a crowdfunding advisor and founding board member of the Crowdfunding Professional Association. “We hoped Elisse Walter might, but that didn’t pan out. With Mary Jo White now at the helm, we are optimistic since she has publicly prioritized getting these regulations out. However, she needs time to acclimate, and no one wishes to push her.”
Many startup founders would enthusiastically support hastening the crowdfunding process. Several have investment portals ready but are operating at minimal capacity due to existing securities regulations that only permit investments from friends, family, or accredited investors, defined as wealthy individuals. Klein asserts that her startup’s revenue could "double overnight" once it can offer investments to regular, non-accredited investors under the JOBS Act’s provisions. Gregory Simon, CEO of crowdfunding platform Poliwogg, has publicly criticized the federal government for the delay in crowdfunding measures, equating it to fraud. Rep. David Schweiker, who leads the House committee on small business, has also called out the SEC for hindering the nation’s economic growth through these hold-ups.
Even if the SEC introduces proposed crowdfunding guidelines promptly, possibly by early June, it will take nearly a year for the regulations to become effective. This timeframe includes three months for public commentary, an additional three months for the SEC to revise rules based on feedback, and a further three to six months for the Financial Industry Regulatory Authority (FINRA) to set up a registration process that adheres to the finalized regulations. This timeline pushes the fulfillment of the JOBS Act’s vision of widespread investment into the second quarter of next year. However, don’t hold your breath, as it remains uncertain when progress will truly be realized.