Is the SEC Trying to Save Crowdfunding?


Many backers have been disappointed by the delays that have occurred since the announcement of the JOBS Act in 2012. The goal was to open up a number of capital markets and allow for equity crowdfunding to non-accredited backers so that everyone could have the chance to start and invest into a successful business. This has created a gap where states in the US are adopting their own equity rules. In other words, with the SEC delaying crowdfunding rules, they may end up saving the platform as an unintended consequence.

Why Does the SEC Fear Crowdfunding?

There’s one simple reason that shows the fears that the SEC has about crowdfunding are founded: potato salad. If someone can raise more than $50k to create a better potato salad, it is evidence that not every backer is thoroughly researching the investment opportunities that come their way. A lack of research inevitably leads to a financial crash and that leads to market instabilities like those of 2008. No one wants a repeat of that.

Will ignoring deadlines help the SEC reduce fraud? Possibly. It also denies the thousands of companies and backers who are looking for clear rules to be implemented so they can be able to get started on the next great idea. That’s why more than a dozen states in the US have enacted their own approaches to crowdfunding.

Is State-By-State Crowdfunding Good? Bad? Or Both?

Texas has proposed crowdfunding rules that are decidedly liberal when compared to SEC concerns. Texas would allow companies to raise up to $1 million annually without audited financials or extensive disclosures. There wouldn’t even be any annual filing requirements. A private crowdfunding portal that performs vetting functions on companies that are running campaigns would be good enough in the eyes of Texas to regulate the industry. Indiana and Michigan already have similar rules in place.

The truth is that almost every state is not as concerned about fraud as the SEC tries to be. So concerned are they about fraud that they’re moving to shut down crowdfunding platforms that have started up despite being 24 months overdue on a deadline for crowdfunding rules to be put in place.

There isn’t a stampede to get crowdfunding campaigns up and running in most states. Five or six dozen active campaigns tends to be the average that is being seen across the board. Many food and beverage companies seem to be the successful stories that are seen so far. Yet crowdfunding sites that were designed for state-specific businesses are finding so much interest that many are approving campaigns that originate from outside of their borders.

The SEC is supposed to have rules already in place. If they don’t, then maybe the great state experiment on crowdfunding will continue and we’ll all see how successful it can potentially be.