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Equity Crowdfunding at Last, But Still Incomplete

More than three years after the JOBS Act was signed into law by President Obama, the Securities and Exchange Commission (SEC) today will finally vote to approve equity crowdfunding rules. The final rule implementing Title III of the Jumpstart Our Business Startup (JOBS) Act of 2012, though late in coming, represent a first step for policymakers in getting public policy in step with America’s crowdfunding heritage.

When a small firm grows by giving a community of funders a share in the profits—rather than just token items such as t-shirts—that’s known as equity crowdfunding. And it’s an idea whose time has come, because it is an idea that has always been here. Henry Ford, as I have written in a paper for CEI, crowdfunded among his friends and neighbors 100 years ago to build what is now Ford Motors. In pre-colonial days, Ben Franklin sold equity stakes in the fire insurance company he founded.

But over the past few decades, the practice of equity crowdfunding has waned because of mounds of red tape from federal securities laws and the SEC. These rules—along with ever-more burdensome laws such as Sarbanes-Oxley and Dodd-Frank—have made it in many instances impossible to raise funds from friends and neighbors, as it could cost $1 million in compliance to raise $50,000. While fraud should of course be punished, showering innocent entrepreneurs and investors with prohibitive paperwork punishes the innocent.

Initial reports indicate that the final rule is much improved from the proposed rule. In comments on the proposed rule in 2014, I urged the SEC to “avoid costly, paternalistic requirements on crowdfunding that have the effect of keeping the status quo and locking ordinary investors out of startup capital.” It looks like the SEC has taken this advice from me and others and will eliminated burdensome requirements from the old rule such as audited financials for small crowdfunding firms.

The rule will still be limited, however, due to the fact that entrepreneurs can only crowdfund up to $1 million and face broad threats of litigation due to a last-minute weakening of Title III by the Democrat-controlled Senate in 2012. Entrepreneurs still need more freedom to crowdfund in larger amounts and with less red tape. That’s why Congress must finish the job with a JOBS Act. 2.0.”

I will be at the SEC open meeting today, at which the equity crowdfunding rules are expected to be approved. To schedule an interview, please contact my colleague Christine Hall at Christine.Hall@cei.org or (202) 331-2258.