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

"Mary Jo White obviously comes to the agency with a strong enforcement background, but it is unknown what her views are on capital formation," Zuppone says, adding that "at this point it would be pure speculation" to comment on when the agency might meet the requirement of Congress to implement the JOBS Act.

Sunny Joseph Barkats, the founding partner of JSBarkats PLLC in New York, which specializes in corporate, capital markets and securities law, says that "as of now, the SEC hasn't even started" the process of enacting the crowdfunding rules, and "nobody sees a chance of the rules being implemented until early 2014, at best."

The SEC last May provided a Q&A about crowdfunding intermediaries, but reminded issuers that "any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws."

Crowdfunding

Title III of the JOBS Act amended the Securities Act of 1933 to allow an individual with a net worth or annual income below $100,000 to invest up to the greater of $2,000 or 5% of their annual income in a small business in a 12-month period. The investment limit would increase to the greater of 10% annual income or net worth if the investor's income or net worth exceeds $100,000.

The solicitation for crowdfunding investments will be made through an intermediary, which could be a broker registered with the SEC or a "funding portal," which will likely be self-regulated by the Financial Industry Regulatory Authority, or FINRA.

One of the major roles of the funding portals is to make a careful review of the businesses soliciting equity or debt crowdfunding investments to prevent fraud. It remains to be seen, of course, if FINRA really will turn out to be the regulator of the portals. However, it's obvious that the SEC has a big stake in the crowdfunding rules, because the agency simply isn't geared to handle what would possibly turn out to be thousands of fraud complaints, if even one fraudulent business was successful in attracting a large pool of investment capital through crowdfunding.

Barkats says that "the portal will be very careful, and the market can self-regulate. One fraud is a death sentence for a portal."

Kickstarter is an example of a successful portal that has avoided fraud, Barkats says. "Kickstarter has already transitioned more than $220 million, and no fraud has yet been detected or complained about," he says.

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