Equity Crowdfunding: Will the SEC and FINRA Kill It in its Cradle?

| December 13, 2012 | Be first to comment

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One after another, industries are changing under the onslaught of the Internet. Newspapers reeling…  brick and mortar stores hit by online retailers… universities going online. Will traditional funding of small businesses and entrepreneurs by banks and broker-dealers be next?

Maybe.  It’s one of the reasons why, in April, 2012 President Obama signed into law the Jumpstart Our Business Startups Act, better known as the JOBS Act

Under the new law, web portals will act as an intermediary between entrepreneurial small businesses and investors.

Crowdfunding Model

The powerful model of website intermediaries collecting and disbursing funds while spreading the word about opportunities through social media is working already for donations and lending. (See GoFundMe, Kiva, Upstart, Kickstarter, and others.)

But crowdfunding investment portals are waiting for rules from the U.S. Securities and Exchange Commission and FINRA before they can conduct business. Word is the rules may not be out before Spring 2013. Until then, any shares offered would be unregistered securities.


The question is… will the SEC and FINRA smother the promise of equity crowdfunding? Considering how slow the securities industry is to fully adopt social media due to misunderstanding and fear of rules and regulations , it’s a real concern.

Once the rules have been issued, a small business could, theoretically, raise up to $1 million annually and be exempt from registering shares with federal and state securities regulators.  That eliminates a major cost of raising capital. The requirement to disclose risk and all material facts to investors, however, would remain.

There are limits on how much an individual could invest. For incomes under $100,000, there is a $2,000 limit per investment and a total of 5% of income for all investments. For incomes over $100,000, the limit is 10% of income. But there is no enforcement mechanism as yet. I would imagine the regulators are thinking a lot about that.

NASAA Warnings

A huge number of sites are up and waiting for the rules to be issued. According to the North American Securities Administrators Association, nearly 6,800 websites with “crowdfunding” in their domain names have sprung up since the law was signed. NASAA, which has created an Internet Fraud Investigations Group, has placed crowdfunding at the top of its current list of investor threats.

However, “[m]any of these sites appear to have been formed by large credible organizations,” said Robert Moilanen, Minnesota Securities Director and chair of NASAA’s Internet Fraud Group, in an interview with Advisor One.

Most portals are domain sitters or fly-by-nighters and there is an expectation of a shake-out once the portals are authorized.

New Ways of Thinking

One could easily imagine highly-reputable companies, brand names, building websites that walk small business owners through everything they must disclose in order to be complaint with the law. Brand names that are comfortable with the Internet revolution. Highly-reputable companies that understand what disintermediation is all about and have a proven record of success.

As they write the rules, will the SEC and FINRA see only the risks of equity crowdfunding? Or will they also see the possibilities of a whole new way to use the Internet to fund the next American dream? 


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