Crowdfunding: Don't Start Your Engines Just Yet

Crowdfunding has landed with a thud! On Wednesday, the SEC issued 568 pages of proposed rules for Title III of the JOBS Act – aka crowdfunding. Embedded in it were 295 questions for interested parties and the public at large to comment on, ranging from how to calculate the $1 million per year limit on how much issuers can raise (ie. should that be net of fees? should other non-crowdfunded fundraising be included or exempted?) to the economic impact of the proposed rules (question #295). 

SEC commissioners weighed in on the historic moment, proclaiming it a step forward in a "bold experiment" that has "great potential" to unleash capital for the nation's small businesses, but one that will take some time to get right. Others interpreted the voluminous proposal as the SEC kicking the can further down the road while appearing to fulfill its duty to issue rules mandated in the JOBS Act (already more than ten months behind). 

While the details are sorted out, the broad outlines of crowdfunding remain the same: 

- Companies can raise a maximum of $1 million through crowdfunding in a 12-month period
- Investors whose income and net worth are less than $100,000 are limited to $2,000 or 5% of their income, whichever is greater, in aggregate crowdfunding investments over a 12-month period
- Investors whose annual income or net worth is greater than $100,000 may invest up to 10% of their income or net worth, not to exceed $100,000 in a 12-month period
- All crowdfunding transactions must take place on an SEC-registered intermediary - either a broker-dealer or a crowdfunding portal
- These intermediaries must take measures to educate investors and mitigate fraud
- Companies raising money on these platforms must provide basic financial information (the proposed rules require audited financials for offerings greater than $500,000)

So when can we expect mainstream investment crowdfunding to be ready for prime time? 

Not so fast. 

Wednesday's proposed rules kick off a 90-day comment period. At the end of the comment period, SEC staffers will study the comments and consider whether to recommend tweaks to the proposed rules to their bosses. Sara Hanks, an attorney and the CEO of CrowdCheck, notes that the end of the comment period does not imply any action on the part of the SEC – in fact, in practice, proposed rules often languish for many months. Given the controversy surrounding crowdfunding and the magnitude of the questions buried in the proposed Title III rules, this recommendation stage is likely to stretch on for at least three months, if not many more.

The next step would be for the SEC commissioners to formally adopt the rules (or reissue rules and start the process all over again, which is considered unlikely). Bottom line: final crowdfunding rules are not likely to be released until six months out, at the earliest. 

Add in some time for FINRA, the industry regulatory body, which must issue its own rules and guidance, and a registration period for crowdfunding portals, and mainstream crowdfunding will not be a reality until mid-2014 at best.

In the meantime, read the proposed rules here, and offer your own (constructive) comments here.