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BusinessColumnistsJamie Herzlich

Small Business: Still waiting for SEC crowdfunding rules

The Securities and Exchange Commission headquarters in Washington

The Securities and Exchange Commission headquarters in Washington D.C. on Dec. 17, 2008.

It's been 16 months since the Securities and Exchange Commission released proposed rules for equity crowdfunding. Passage of final rules has been eagerly awaited by small businesses, many of which have been shut out of traditional equity funding.

The SEC's 585-page proposal lays the framework to enable businesses to raise up to $1 million a year from the public via online crowdfunding portals. It's on the agency's rule-making agenda for October, but some industry experts are skeptical.

"The SEC has a habit of making promises and not delivering," says Sherwood Neiss, co-founder of Crowdfund Capital Advisors in San Francisco and co-author of "Crowdfund Investing for Dummies" (Wiley; $26.99).

President Barack Obama signed the Jumpstart Our Business Startups Act in April 2012 giving the SEC 270 days to issue rules. The agency issued proposed rules in October 2013 and then held a 90-day public comment period, says Neiss, who helped create the crowdfunding framework used in the JOBS Act.

The industry has been awaiting final rules ever since.


Regular investors welcome

Title III of the JOBS Act would allow businesses to raise up to $1 million annually from the public at large (ie. non-accredited investors) via regulated crowdfunding platforms.

Currently, public solicitation or advertising of a private equity offering is permitted only if all purchasers are accredited investors (i.e., large institutions or high-income, high-net-worth individuals), notes Alon Kapen, partner in charge of the Emerging Companies and Venture Capital Group at Farrell Fritz PC in Uniondale.

"It precludes all your friends and family that know, love and trust you from investing in your business," Neiss says.


SEC says it's a priority

The SEC declined to comment on criticism over delays in releasing final rules, but spokesman John Nester noted, "Chair Mary Jo White has said completing the rule-making is a priority." It's "on the list of rule-makings the Commission expects to act on by October 2015," he said last month.

But even if rules are released then, it takes 60 days for them to be published in the federal register and become law, Kapen says. While he's anxious for final rules, "in defense of the SEC, they have been under enormous pressure in rule-making under Dodd-Frank and the JOBS Act," he says.

The proposed rules were "controversial because they were so burdensome," Kapen notes; it's estimated compliance costs could consume more than 15 percent of offerings.


Compliance costs criticized

For instance, firms raising more than $500,000 would be required to submit audited financial statements, says Phillip Laycock, an audit partner at Jericho-based Grassi & Co., a CPA and business advisory firm.

Hiring an accounting firm to do this could cost $18,000 to $25,000 on the low end, he says.

The firm submitted a 35-page letter to the SEC in January 2014, during the comment period, urging the agency to raise the threshold to $700,000.

"That would make the parameters just a little more workable," Laycock says. "In reality, I believe it should be higher than that."


Law limits rule-making

While he'd like to see final rules issued, he says the "SEC did craft rules in accordance with the law," noting "the law itself was restrictive on what they could do with the rules."

Scott E. McIntyre, a board member at the Manhattan-based Crowdfunding Professional Association, a trade group, called the proposed rules impractical, adding: "I do not believe they will be implemented in that form."

Meanwhile, 13 states, not including New York, have issued their own equity crowdfunding rules for intrastate offerings, Kapen says. "A lot of people have a lot invested here," he notes.

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