A bipartisan group of senators is pushing the Securities and Exchange Commission to propose rules that would allow startup companies to raise capital from investors online.
A provision that eased securities registration requirements for small companies was included in the Jumpstart Our Business Startups Act when it was passed by Congress in April 2012. The SEC was to have proposed rules for so-called crowdfunding within nine months of enactment. The commission is now 8.5 months past that deadline.
“It has now been over 530 days since the JOBS Act became law, and we have not seen a proposal from the SEC on crowdfunding,” Sen. Jeff Merkley, D-Ore., a member of the Senate Banking Committee, and seven other senators wrote in a letter to the SEC. “We are concerned that so much time has passed without action.”
The other senators signing the letter were Jerry Moran, R-Kan., Michael Bennet, D-Colo., Mark Warner, D-Va., Kelly Ayotte, R-N.H., Jon Tester, D-Mont., and Mary Landrieu, D-La.
On Monday, the SEC announced an open meeting for Oct. 23 to consider crowdfunding rules. A spokesman for the agency declined to comment on the senators' letter.
In July, the SEC proposed rules that would allow companies to advertise unregistered securities to the general public — another JOBS Act provision. Lawmakers from both parties have criticized the SEC for the long delays in proposing rules to implement the law.
Supporters contend that the law makes it easier for entrepreneurs to find investors and raise money to launch companies that will create jobs. State securities regulators and other skeptics have warned that JOBS Act changes could leave investors vulnerable to online rip-offs.
Under the JOBS Act, ordinary investors with less than $100,000 in net worth can purchase up to $5,000 in equity in small firms online over a 12-month period. If their net worth is more than $100,000, they can invest up to $10,000. They do not have to meet accredited-investor criteria.
Sherwood Neiss, a principal at Crowdfund Capital Advisors, said that crowdfunding advocates have been talking to the SEC about self-certification for investors. Under that process, they would have to indicate to a crowdfunding platform their income level and the amount of equity purchases they'd made in the previous 12 months. If they violated investment ceilings, they would be rejected by the platforms.
“We live in the age of technology, and we're going to use it to keep people within the speed limit,” Mr. Neiss said.
In the crowdfunding rule, the SEC will require that either investors themselves or portals verify their eligibility to participate in crowdfunding offerings.
Robert Carbone, founder and chief executive of CrowdBouncer, a crowdfunding compliance software provider, said that the crowdfunding restrictions will introduce a new level of investment oversight.
“Never before has anyone had to baby-sit investors and make sure they're not putting too much money into any particular asset class,” Mr. Carbone said. “This is much more significant than suitability.”
He estimates that about two dozen crowdfunding platforms are currently soliciting accredited investors for unregistered securities and would be in a position to switch over to crowdfunding for small investors, once SEC rules were approved.
“Done right and with input from entrepreneurs and investors, the SEC can create a marketplace that is trustworthy and achieves the goals of the crowdfunding provisions of the JOBS Act,” the senators wrote. “In particular, we have heard from entrepreneurs who have created crowdfunding platforms and those who want to raise capital via this new mechanism, both of whom have been hurt by the delay.”