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.
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.
"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.
Email. Follow @PhilipvanDoorn