NEW YORK (
) -- The
Securities and Exchange Commission
sure loves the
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.
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
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.
"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
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."
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.
The crowdfunding investment intermediaries will also be responsible in providing disclosures to investors "related to risks and other investor education materials," according to rules that will be developed by the SEC. The portals will be required to make sure investors don't violate investment limits or hand money over to businesses raising funds until the aggregate target amount has been raised. Otherwise, investors' money must be returned.
Title III goes further in an effort to keep crowdfunding from becoming a free-for-all, by requiring that portals "not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor," and also by prohibiting "directors, officers or partners" of the portals from having financial interests in the businesses raising money.
"Democratization of Capitalism"
Barkats says the JOBS Act is a "game changer," as even the president and members of Congress "realize that creation of jobs and formation of capital cannot come from bureaucrats but from the bottom up." He calls the legalization of crowdfunding for equity and debt investments in the U.S. the "democratization of capitalism."
"It's insane that institutional investors have the right to participate in the growth of companies, while ordinary people are excluded. The JOBS Act creates a disintermediation between the so-called experts who brought us to a credit crunch and ordinary investors, allowing each and every of us to make a direct decision."
Barkats says medical-research companies provide a good example of how a revolutionary "combination of social media and investors" can benefit entrepreneurs, investors and the entire economy: "If you believe you are on the cusp of an innovative cure, you can solicit from anybody online, and not be held hostage by venture capital firms or Big Pharma, and not be held hostage by so-called non-profit organizations."
"The JOBS Act is a great step in the right direction," says Barkats, "but we need more 'doers' at the SEC than regulators. They are sitting on a great project that will allow our companies to compete with the rest of the world. Let the market be free and let people make their own decisions."
-- Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.