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How the Government Let Us Down on Crowdfunding -- Today's Outrage

NEW YORK ( TheStreet) -- The Securities and Exchange Commission sure loves the big headlines it gets when going after Wall Street, but the agency's foot-dragging over the JOBS Act is just another example of the government letting the rest us down.

And President Obama's nomination of a former federal prosecutor as the next SEC chairman does little to show that he's serious about forcing the agency to implement an important measure that could spur a major economic expansion.

The SEC broke the law by missing its Dec. 31 deadline for finalizing rules that would foster the expansion of small businesses and the creation of jobs. And we might have to wait another year for the Securities and Exchange Commission to do its own job to implement the JOBS Act.

The Jumpstart Our Business Startups Act was signed into law by Obama last April with strong bipartisan support, which is unusual in Washington these days, and underscores the Act's importance at a time when initial public offerings by U.S. companies have slowed and banks are being careful in making loans.

The JOBS Act is meant to spur investment in smaller companies by easing securities registration and reporting requirements, while also opening up fundraising away from traditional markets by allowing entrepreneurs to raise up to $1 million in a 12-month period through crowdfunding.

Funding for small businesses and startup companies that aren't ready to go to the public markets has traditionally been limited to venture capital firms, private equity firms and wealthy individuals known as "accredited investors." The point of crowdfunding is to allow "ordinary" investors to make equity or debit investments in small businesses. This promises a large new source of investment capital for expanding businesses at a smaller cost than equity or debt filing with the SEC.

Regulatory Delay

The SEC was mandated under the JOBS Act to finalize rules to allow crowdfunding by Dec. 31. The Wall Street Journal in December reported that the outgoing SEC chairman had delayed proposing rules to end the ban on general solicitation for investments because of concern over her legacy for protecting investors, and "interference" from consumer groups, concerned that opening up the flood gates for investment could lead to widespread fraud.

While it might not be fair to comment on a federal official's concern over her legacy, there's no question that the SEC has failed to meet its legal mandate to implement the JOBS Act.

President Obama last week nominated former federal prosecutor Mary Jo White to serve as the next permanent SEC chairman.

Michael Zuppone, a partner in the corporate practice of Paul Hastings in New York, says "the SEC staff is working hard at crafting proposed regulations," but that it is "no surprise" that the agency missed the year-end deadline. In addition to Schapiro's departure, Meredith Cross also resigned. She was the SEC's director of the Division of Corporate Finance, who was leading the agency's implementation of the Dodd-Frank banking reform legislation, as well as the JOBS Act.
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