SEC Says Companies Cannot Use Crowdfunding To Raise Funds From Investors Until SEC Issues Rules

(c) Crestock

There is growing eagerness to get equity crowdfunding off the ground, but equity crowdfunding will have to wait until the Securities and Exchange Commission approves rules to regulate it. As the SEC tersely warns issuers: “Any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.”

Congress passed, and President Obama signed in law on April 5, 2012, the Jumpstart Our Business Startups Act (JOBS Act). The new law opens the door to allow entrepreneurs to raise up to $ 1 Million per year — and enables the public to make small investments in such businesses for equity — through crowdfunding.  The JOBS Act also enables the use of Web site funding portals to facilitate such crowdfunding. However, the JOBS Act gives the SEC 270 days to implement regulations to govern equity crowdfunding. Until then, investors, funding portals, start ups and others must wait for the new rules.

Lori Schock, the SEC’s Director of Investor Education and Advocacy, told participants at the InvestEd 2012 conference in Charlotte on June 9, 2012 that companies cannot use crowdfunding to raise money from investors until the SEC issues its rules under the JOBS Act.

Lori Schock, SEC Director of Office of Investor Education and Advocacy (Photo courtesy of the SEC)

“The SEC must first write rules that govern how companies can use crowdfunding to raise money from investors and set out the responsibilities of intermediaries,” said Ms. Schock. “These rules will include what must be disclosed to prospective investors before they decide to participate. As a result, companies cannot use crowdfunding to raise funds from investors until the SEC issues these rules. Obviously, you should be wary of any crowdfunding investment opportunities that are offered before these rules are in place.”

The notice posted on the SEC Web site is blunt:

“On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.”

“The Crowdfund Intermediary Regulatory Advocates (CfIRA) is committed to working with the SEC during the rule making process and to informing the public that securities-based crowdfunding is neither legal nor permitted until this rule-making process is concluded,” said D.J. Paul, a member of CfIRA’s executive committee and co-founder and Chief Strategy Officer of crowdfunder.com. CFIRA is an organization formed by the crowdfunding industry’s leading platforms and experts. “We week to work with the SEC Staff to develop a system which includes transparency, ‘crowd intelligence’ and common sense oversight enacted in such a manner that preserves the integrity and scalability of interest-based platforms envisioned by the act,” said Candace Klein, co-chair of CfIRA and founder of SoMoLend.com.