[ by Larry Goldfarb ]

When the JOBS Act became law in April, a critical provision of the bill was to let to let small companies “crowdfund” — that is, sell stock and other securities over the Internet directly to the public.  A key part of the legislation was to let the Securities and Exchange Commission draft the rules and provisions of the bill.  Well, the year is coming to an end and the SEC has not completed drafting the regulations.  Now why is anyone surprised?

The original mission of the SEC was to ensure that consumers did not get “taken” from deceptive stock offerings.  Fraudulent offerings and improper touting and marketing were one of the causes of the great depression and ultimately the reason the commission was formed in the 30s.  So even without the departure of S.E.C. chairwoman, Mary L. Schapiro, and three of her top deputies — including two who manage the offices writing the regulations, the bill was bogged down in serious discussion and wrangling.  In other words, there is great trepidation at the agency to allow this type of financing.  For example, The S.E.C. employees began accepting comments from and arranging meetings with interested members of the public about “crowdfunding” shortly after the Jobs Act became law. In those meetings, agency officials have come in with white papers fully highlighted, line by line, to discuss it.”

But the law insists on strong investor protections, and as a result, the S.E.C. must iron out numerous issues concerning how “crowdfunding” can allow for consumers to efficiently invest in small businesses but at the same time, protect those investors from shams and other issues. Small businesses, especially start-ups, are notoriously risky; in essence, the S.E.C. is writing rules that will govern a very dangerous game.

Members of congress who drafted the bill love to eliminate regulations and cut red tape until it comes back to bite them.  Remember the reduction is verification of identities of victims of hurricane Katrina.  FEMA began handing out these cash cards to all who said they were impacted until it became clear that a lot of fraud was involved.  Congress screamed at the level of fraud.  How about congressional actions to effect the elimination of paper work requirements to receive a mortgage. 

The S.E.C. knows that it is sitting on a similar powder keg with “Crowdfunding.”  Experts who have studied the process do not expect completed regulations before the beginning of 2014.

For more information, please read, [NY Times, 12/26/12].