When the JOBS Act was signed into law, its knotty crowdfunding provisions quickly became a source of consternation for the SEC. More than one year later, the law continues to languish, as the SEC moves slowly to implement its two most important provisions. One would enable general advertising for private investment offerings, and another would open the floodgates by allowing unaccredited investors to participate in online equity crowdfunding.
Early last month, Republicans accused the SEC of missing deadlines and not making the JOBS Act a priority. Some investors’ advocates would rather the SEC take its time to incorporate regulations that protect investors from fraud and the withholding of critical financial information. But the JOBS Act already lets small companies, which are defined as having less than $1 billion in annual revenues, file for an initial public offering with much less detailed financial information.
The SEC’s new chairman Mary Jo White says that attending to JOBS Act rule-making is among her top priorities. But many are still frustrated by the lack of specificity and follow-through in the decision-making timeline.
The JOBS Act itself remains controversial. In a New York Times op-ed, former Wall Street financier and Obama’s “auto czar” Steven Rattner expressed his dismay, calling it the “greatest loosening of securities regulation in modern history.” He says unaccredited investors have a better chance of buying a winning lottery ticket than seeing a return on a startup with even a modest track record and growth prospects. Meanwhile the Case Foundation, the Kauffman Foundation, and Startup America Partnership are among those who contend that the JOBS Act is vital for driving innovation and economic sustainability for the nation.
Despite the controversy, several companies are already completing transactions, keeping their fingers crossed that the SEC will greenlight the pending provisions of the JOBS Act in time to launch their offerings. Earlier this year, EarlyShares partnered with Point Capital Markets to offer its first equity deals focused on technology startups, while CircleUp, which is more focused on niche verticals like food and retail, has already helped 11 companies raise $10 million in its first year. Other notable success stories include FundersClub helping startup Soldsie raise $425,000 for its seed round.
Many of the platforms plan to conduct funding activities in partnership with broker-dealers who actually manage the transactions and the money from the “crowd” of investors. Equity crowdfunding platform 99Funding and its affiliated broker-dealer, North Capital Private Securities Corporation, are among those looking to lead the way. Jim Dowd, founder and managing director of North Capital, says his company is focused on building the back-end transactional technology, which he hopes will power many emerging crowdfunding platforms.
According to Dowd, the 8-12% fee charged by broker-dealers at the end of a completed deal will help fund the necessary due-diligence and underwriting to protect investors from fraudulent activity. “We agree with the sentiment that’s been expressed by the SEC and state regulators that investor protection has to be the focus of rule-making,” he says. “We’re concerned that fraudulent players or poorly organized crowdfunding platforms are going to take advantage of investors. But fraud is not a unique risk to crowdfunding—there is fraud in most financial markets, including highly regulated securities markets.”
With activity likely to heat up, and many investors eagerly awaiting the SEC’s final decisions on the JOBS Act, equity crowdfunding is poised to open the floodgates for anyone looking to invest in startups. But the Act’s seemingly real potential to boost the job market and the economy will continue to be balanced against potential risks to unsophisticated investors. Much of the promise is still hypothetical.
