Frustration Rises Over Crowdfunding Rules

Critics Say Two-Year-Old JOBS Act, Intended to Help Entrepreneurs Attract Investments, Requires Major Revisions.

Ron Wilson, right, CEO of Hylete, a maker of performance cross-training apparel, is looking forward to future equity crowdfunding possibilities. Sam Hodgson for The Wall Street Journal

Ron Wilson, right, CEO of Hylete, a maker of performance cross-training apparel, is looking forward to future equity crowdfunding possibilities. Sam Hodgson for The Wall Street Journal

Ruth Simon And Angus Loten | WSJ | April 30, 2014 – Unhappy with results so far of the two-year-old Jumpstart Our Business Startups Act, some Republican lawmakers are pushing for changes that could weaken investor protections. They argue that entrepreneurs find some of its provisions too burdensome.

The so-called JOBS Act modified U.S. securities laws, increasing the number of investors a private firm may have, to 2,000 from 500, for instance, and eliminating some hurdles for companies seeking initial public offerings.

It also lifted the “general solicitation” ban preventing entrepreneurs from advertising sales of equity in their small, private companies to wealthy individuals, known as “accredited investors.” Another provision, yet to take effect, will allow small companies to raise funds from average investors online through a process known as “equity crowdfunding.”

Enacted in April 2012, President Barack Obama hailed it as a potential “game-changer” for small, private businesses eager to raise money. Congress left it to the Securities and Exchange Commission to set final rules on how provisions of the new law would be implemented, a task the agency has yet to fully complete.

The JOBS Act’s benefits so far have been ho-hum, in the eyes of some of its critics. Thus, several House Republicans now are putting forth “JOBS Act 2” proposals, arguing that legislation Congress passed in 2012 is too restrictive for small firms.

Their proposals are a long shot, with little likelihood of being enacted into law this year, in part because there is little appetite to further roll back the securities laws in the Democratic-controlled Senate. But the discussion underscores a sense of disappointment and frustration with how the JOBS Act is playing out. In congressional testimony Tuesday, Securities and Exchange Commission Chair Mary Jo White said that completing key rule making required by the JOBS Act was a top priority.

One big problem, critics say, is that it will be difficult for entrepreneurs to tap their social networks to raise money to buy equipment, add staff or upgrade to a new office building under the law’s “equity crowdfunding” provision. A hallmark of the 2012 law, the equity crowdfunding provision isn’t expected to become effective until later this year because the SEC is still hashing out final rules allowing companies to sell equity stakes in businesses to everyday investors through social media and the Internet.
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