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SEC – Roadblock to Equity Crowdfunding?

With such a promising name, what’s not for entrepreneurs, small businesses and venture capitalists to love about the Jumpstarting Our Business Startups Act (JOBS Act)?[1] Indeed, the Act was passed with bipartisan support in both houses and signed into legislation by President Obama on April 5, 2012. At its passage, the JOBS Act was widely proclaimed as a promise for growth for small businesses and start-ups because of the Act’s capacity to increase access to capital.[2] Despite this initial phase of promise, the JOBS Act has gotten off to a rather slow start in the realm of equity-crowdfunding.

One of the ways in which the Act is designed to help startups is by making it easier to obtain additional capital through equity crowdfunding. Although it has been a buzzword for the last few years, crowdfunding is not a new phenomenon. Traditional crowdfunding is defined as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”[3] In the United States, the Securities Act of 1933[4] and the Securities Exchange Act[5] restrict the potential means of generating funds via crowdfunding. These Acts prohibit entities from offering or selling securities to the public unless the offering is registered with the SEC, or unless there is an exemption from registration. Thus, the SEC registration requirements have limited crowdfunding to a means of generating capital from contributors without the prospect of financial return on investment (i.e., no equity offerings for funders). Accordingly, crowdfunding enterprises solicit funds by means such as offering prizes for donations or by offering funders the option to purchase a product prior to the product’s release on the market.[6] But even with the availability of numerous crowdfunding platforms[7] to incentivize offerings, many enterprises currently find it difficult to access substantial capital using traditional means of crowdfunding.

Equity crowdfunding in the United States, however, would enable enterprises to issue equity in return for crowdfunders’ contributions. The prospect of return on investment would entice many would-be-funders to take the financial leap-of-faith and support startups. Equity crowdfunding can also be particularly useful to small-business owners who have been unable to secure adequate funding through more traditional means like small business loans. To date, many foreign countries, particularly member states of the European Union and Hong Kong, have already capitalized on the potential of crowdfunding by permitting startups to issue equity to investors.[8]

The JOBS Act recognizes the potential for equity crowdfunding and amends the provisions of the Securities Act of 1933 and the Securities Exchange Act that foreclose the opportunity to crowdfund due to SEC registration requirements.[9] The “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,”[10] in particular, addresses the conflict by creating an exemption for unregistered securities offered by private companies via the “crowdfunding exemption”[11].

But still, further government action is necessary before the crowdfunding exemption can go into effect. In an effort to protect investors from the potential of fraud that equity crowdfunding entails, the Act requires the SEC to issue rules governing the crowdfunding provisions.[12] The Act provides a period of 270 days from the date of enactment[13] in which the SEC is to issue these rules. On December 31, 2012, this 270-day period expired without any such rules having been announced.

Although it has been nearly a year since the legislation was enacted and three months since the expiration of the deadline, there is no indication the rules will be issued any time soon. Factors that may be contributing to this delay include a rulemaking-backlog (created largely from the 2010 Dodd-Frank Act mandates) and a still-pending change in chairmanship at the SEC.

So when can we expect equity-crowdfunding to go into effect? It depends on whom you ask, but the prognosis generally is not good. Many fear it will not be any time soon,[14] while others claim at earliest next year.[15] Even worse, some believe that even if the SEC does issue rules, the rules may be so complicated as to preclude the opportunity to equity crowdfund in practice.[16]

In the meantime, small businesses and would-be entrepreneurs are feeling the hit. But they are hardly waiting idly by. Crowdfunding organizations are seeking the media’s attention through venues such as the National Press Club in Washington DC, as well as speaking with the SEC directly to inform the Commission of the industry’s current investor protection mechanisms.[17] Members of the Crowdfunding Professional Association, for example, have already met with the SEC more than thirty times.[18] Despite the industry’s efforts to push-start the crowdfunding exemption into action, the wait continues. If and when the SEC finally issues the rules, the crowdfunding exemption has enormous potential to help small businesses.

[1] Jumpstart Our Business Startups Act (JOBS Act), Pub. L. No. 112-106 (2012).

[2] See, e.g., JOBS Act Promises to Improve Access to Capital, Husch Blackwell (Apr. 5, 2012),

[3] Tanya Prive, What Is Crowdfunding and How Does it Benefit the Economy? Forbes (Nov. 27, 2012, 10:50AM)

[4] Securities Act of 1933 §5, 15 U.S.C. §77e (2006).

[5] Securities Exchange Act 15 U.S.C. §78d.

[6] See generally Thaya Brook Knight et. al., A Very Quiet Revolution: A Primer on Securities Crowdfunding and Title III of the JOBS Act, 2 Mich. J. Private Equity & Venture Captial L. 135, 135-36 (describing four current methods of crowdfunding in the United States).

[7] See generally Devin Thorpe, Eight Crowdfunding Sites for Social Entrepreneurs, Forbes, (providing an overview of top crowdfunding platforms).

[8] Ralf Hooijschuur, Crowdfunding in Different Countries – Legal or Not? Squidoo (last visited Mar. 18, 2013).

[9] Securities Exchange Act 15 U.S.C. §78d.

[10] JOBS Act, Pub. L. No. 112-106 §301 “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012.”

[11] Id. at §302

[12] Id.

[13] Id.

[14] See, e.g., Destiny Bennett, SEC Stalls in Setting Rules for Crowdfunding, AGBeat (Feb. 21, 2013),

[15] Kathleen Pender, Crowdfunding Awaits Key Rules from SEC, SFGate (Feb. 8, 2013, 6:58PM),

[16] Marco Santana, Entrepreneurs Await Rules for Crowd-Funding Clause, USA Today (Jan. 20, 2013, 10:03PM), (worrying that the rules the SEC ultimately provides will render the crowdfunding clause impracticable.).

[17] Catherine Clifford, Crowdfunders Step Up Lobbying for SEC Rules, Entrepreneur (Feb. 19, 2013),

[18] Id.