7/28/2019 Why Equity Crowdfunding Won't Happen This Year

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“Why Equity Crowdfunding Won'tHappen This Year” 

This post is by David 

Drake, founder and 

chairman of LDJ Capital,

a New York  City private-

equity firm, and of The

Soho Loft Capital Creation

Events series, a global 

events and media

company. 

It seems crowdfunding for

equity in the US will take at least another year before it transforms the

legislative and regulatory Securities & Exchange Commission Act of 1933

and 1934. The US is the first and only country in the world actually

changing its charters to allow crowdfunding for equity to roam freely among

its citizens. The negativity from naysayers has been adamant and

deliberate. Yet we maintain that the industry is estimated to reach $6 billion

in 2013. 

I have outlined 10 Steps necessary for the implementation of crowdfunding

for equity (where stocks are exchanged for cash via online sites), which was

part of President Obama‟s Jumpstart Our Business Startup (JOBS) Act,

signed into law April 5, 2012 and soon to see its first anniversary. The SEC

had a deadline to interpret the intentions of the House of Representatives

and the Senate in the JOBS Act and to translate those intentions into

compliant laws and procedures. The SEC has to date facilitated enacting 3

President Barack Obama shakes hand with Sen.

Scott Brown during the signing of JOBS Act bill. 

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out of 6 title provisions of the Act – the outstanding three are Regulation A

plus, exemption Regulation D, 506c that removes the solicitation ban from

private offerings under SEC and crowdfunding offerings online (cash for

stock). Yet, crowdfunding for equity‟s deadline passed without

implementation on January 1, 2013 and here are some of the reasons.

By the way, crowdfunding is one pillar of crowdsourcing like crowd labor and

crowd innovation. Crowdfunding has four sectors of donation, reward, debt

and equity. Equity is the only issue in the JOBS Act where the SEC oversees

any transactions of stocks in companies being offered. It is similar

toKickstarter‟s[1]  donation system but where you receive stock instead of 

rewards for cash.

The SEC Chairwoman Mary Shapiro resigned Dec. 14, 2012 prior to our first

article. Elisse Walterbecame the interim chairwoman of the SEC and a

couple of weeks ago Mary Jo White was appointed by the White House to

take the chair seat for the SEC current term expiring year end. We outlined

the process the SEC needs to follow and estimated the crowdfunding for

stock title III of the JOBS Act would at the earliest become a legality January

2013 should all things be perfect.

The SEC needs to submit a

proposal and allow 30-90

days for public comments.

In this case it will most likely

be 90 days. However, the

clock of any regulatory

change does not commence

until a proposal has been

made. I can imagine the

fury Elisse Walter “President Obama announced his nomination of 

Mary Jo White as the new head of SEC last Jan.

24, 2013.” Image from White House video of the

announcement. 

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experienced when the White House proposed to replace her so early into

2013. Did she know when she was appointed in December that she was a

placeholder for Mary Jo White?

Regardless, the staff of the SEC has been very hard at work and have

certainly developed a rough draft of a crowdfunding proposal in the last 6

months. Unless Elisse Walter pushes fora proposal to be voted on by the 4

commissioners who vote on these matters with Walter, it is likely that our

predictions about the timing of the SEC process from November last stand

firm.

Mary Jo White will have her Congressional hearing and if passed will be able

to take office by early May 2013 (end of April at the earliest). Thereafter a

new Chairman of the SEC needs 45-60 days to catch up on current events.

TheDodd Frank Act[1]  for funds and policing big business since the 2008

crisis began has been lagging for several years and much is still unresolved

yet a priority. However, we need job creation which the JOBS Act with 6

bills, and which was passed with bi-partisan support last spring, promises.

The JOBS Act initiatives creating jobs seems much more relevant today than

bureaucratic band aids on the stagnating operations of past firms, current

big banks and their practices. So should Mary Jo White be a huge

proponent of crowdfunding and push the envelope, we would in an ideal

world have a proposal prepared July 2013 and voted on by the

Commissioners by August 2013 at the very latest – in an ideal world.

Another 90 days public hearing puts the proposal back to the end of October

and then the SEC staff  needs 45 days to summarize the public comments forthe Commissioners to read. Thereafter they would need at the earliest 30

days to set up a vote. That puts us mid January 2014. Ideally, Mary Jo

White will be pushing this as a priority. Note, Mary Jo White has already

started recusing herself from many SEC cases due to previous work which

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does give her more time on her plate to attend this topic. Let‟s wait and

see.

Jan 2014 we could have the commissioners vote against it and another 6

months would be needed to recreate this same new proposal. Let‟s assume

in an ideal world the commissioners vote 3 yes for the proposal – then we

would see FINRA[2]  get the job of going through the same process starting

at the very earliest end of February 2014 and now this cycle could take

another 3-9 months. Crowdfunding for equity in this ideal world scenario

would be a legal practice by Summer 2014. 

On a more positive note, assuming Elysse Walters pushes through with a

proposal before Mary Jo White is put into office or Mary Jo White does not

get the position which is also possible, then a ruling by SEC could be

possible by end of Q3, 2013.

Sara Hanks[3]  of  CrowdCheck.com[4]  adds her perspective to this

timeline. Of the final stages of approval, she says, “Legally there‟s no way

this can happen in less than three months, so the earliest point at which

investment crowdfunding could be possible would be the third quarter.

Normally FINRA rulemaking would follow SEC rulemaking but they are

clearly doing a fair amount of work ahead of time, so the FINRA process

might not result in much of a delay.”  

We have been called pessimistic but we like to be referred to as realistic.

We know that Title II Removal of the Solicitation Ban on SEC exemption

Regulation D, exemption 506 has precedent over crowdfunding so we feelthat crowdfunding will not be legal for companies to use until early summer

2014. We would like to be wrong and remember, we cannot predict the

timeline with more accuracy until a SEC proposal has been submitted for

public opinion.

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There will be discussions on the regulatory changes of the JOBS Act and the

financial impact of all six bills at Thomson Reuters „ and The Soho Loft[5] 

Secondary market and restricted stock liquidity conference on the one year

anniversary of the signing of the JOBS Act bill by President Obama in Boston

this April 5, 2013.  We would love to see a SEC proposal submitted by then

for public commenting.

These are SEC processes put into place for a reason and changing the Chairs

of the SEC has delayed this aspect of the law. We are working hard with the

SEC to bring crowdfunding for equity into fruition and the world is watching

the US as we collectively frame and move to enact this financial innovation.