By I, Cringely
Earlier this year I wrote a series of columns about crowdfunding and the JOBS Act, which was signed into law last April with several goals, one of which was to help startups raise money from ordinary investors. Those columns were about the promise of crowdfunding and the JOBS Act while this one is about what progress has been made so far toward that end. For startups, alas, the news is not entirely good. Crowdfunding looks like it may not be available at all for the smaller, needier companies the law was supposedly designed to serve.
It’s one thing to pass a law and quite another to write rules to carry out that law. Title 3 of the JOBS Act required the U.S. Securities & Exchange Commission (SEC) to write rules for the so-called crowdfunding intermediaries or portals specified by the Act, to choose or create a regulator to monitor those new entities, and to write rules clarifying how deals could be advertised to non-accredited middle class investors.
My research so far suggests that while the rules are coming along toward defining the crowdfunding portals, the SEC is taking a conservative approach that will effectively disenfranchise most startups looking for capital. Specifically it appears the SEC is uncomfortable relying solely on crowdfunding portals to handle the deals and is leaning toward requiring registered broker-dealers be part of each crowd funded transaction.
Involving broker-dealers is not bad in itself, but it will change the nature of the deals, making them larger. There’s another entity to be paid, for one, meaning a lower return for the entrepreneur because of higher costs. Broker-dealers are already involved in private placements that average $700,000. Will they even be willing to look at smaller deals?