Crowdfunding Remains on Hold Until SEC Issues Rules
The Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act, also known as the CROWDFUND Act, carved a new exemption out of the Securities Act of 1933 and established a new method of raising capital for start-up businesses online. Once the Securities and Exchange Commission ("SEC") issues the rules required to implement the CROWDFUND Act, startups will be able to "crowdfund" capital by raising a pool of funding from small investments by a large number of investors through a broker or an online funding portal.
Internationally, several online funding portals for crowdfunding already exist. Indiegogo, for example, was formed in 2007 and is one of the leading crowdfunding platforms – it has raised millions of dollars for a multitude of different projects worldwide from startup businesses to charitable campaigns.
The CROWDFUND Act is intended to provide easy access to the same types of crowdfunding portals for domestic businesses by allowing up to $1 million in capital to be raised through a registered portal from non-accredited investors in an offering that is exempt from the requirements of preparing a prospectus and filing a registration statement with the SEC.
However, even though the CROWDFUND Act has been enacted into law by Congress, crowdfunding remains in limbo. The CROWDFUND Act directs the SEC to prepare rules and regulations necessary and appropriate to carry out the provisions of the Act. This would include such things as determining the registration process for crowdfunding portals, determining minimum requirements for investors and so forth.
Until the SEC has established those rules and regulations, the opportunity to raise capital through crowdfunding remains on hold. The CROWDFUND Act gives the SEC until January of 2013 to issue these rules and regulations, but most SEC observers believe the SEC will miss this deadline.
Additionally, crowdfunding is waiting on rules and regulations from other regulatory organizations. The CROWDFUND Act requires funding portals or brokers that intend to crowdfund capital for issuers to register with an applicable self-regulation organization ("SRO") such as the Financial Industry Regulatory Authority ("FINRA"). SROs are not subject to the January 2013 deadline established by the Act. FINRA began seeking public comment on potential crowdfunding rules in July of 2012, but to date it has not issued any final rules.
While methods of raising capital similar to crowdfunding do currently exist, any such offering would require, at the very least, registering with the SEC under the Securities Act of 1933, which can be an expensive and onerous process. Until the SEC and the applicable SROs promulgate final rules, the exemption to registration for crowdfunding remains out of reach to many of the small businesses and start-ups that are eager to use it.