The Securities and Exchange Commission (SEC) and state regulators are warning small businesses and entrepreneurs to wait to join the crowd.
In an advisory on Wednesday, state regulators warned small businesses that they should wait until the SEC has finalized its crowdfunding rules before offering shares in their ventures for public sale. “Until that time, federal and state securities law prohibitions remain in place against publicly accessible Internet securities offerings,” said the North American Securities Administrators Association (NASAA), a state regulators’ trade group.
Indeed, the chief counsel of the SEC’s Division of Corporation Finance, Thomas Kim, told the SEC’s Investor Advisory Committee during its first meeting in May that as part of the Jumpstart Our Business Startups (JOBS) Act, which was signed into law in April, the division is grappling with the issue of equity crowdfunding, which allows investors of any net worth to fund entrepreneurial startups. “Crowdfunding is not yet legal until the commission appoints rules,” Kim said.
The JOBS Act directs the SEC to adopt rules within 270 days to implement a new exemption to allow entrepreneurs and small businesses to offer investments in their ventures through crowdfunding. But Kim said that a timeframe for an SEC rulemaking on equity crowdfunding is “challenging.”
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SEC Chairwoman Mary Schapiro told a congressional panel on Thursday that staff in the agency’s divisions of Corporation Finance and Trading and Markets as well as agency economists are “working closely together” to develop recommendations for the commission.
While crowdfunding has been going on for a number of years as a form of raising money through donations from donors, the SEC must formalize rules for equity crowdfunding, which, as set out in the JOBS Act, allows capital raising through investors via Internet funding portals.