We have been waiting a long time for this moment. Sitting on the edge of our seats, money in hand for more than 18 months. That's how long it has been -- more than a year and a half -- since President Obama signed the JOBS Act. The 270-day deadline afforded to the SEC to finalize the regulations came and passed and now, 567 days after passage, the monumental portion of the JOBS Act is finally seeing the light of day.
On Tuesday, the SEC held an open meeting (including a live webcast) where they discussed the proposed rules for equity crowdfunding. The JOBS Act's poster child, crowdfunding, would make it legal for the general population -- those not considered accredited in any official sense -- to invest in companies in return for equity. This is a landmark piece of legislation that has raised controversies on how effective it will be at capital creation. During the discussion, many of the caveats of crowdfunding were discussed and once the proposed rules are posted to the Federal Register, the public will have 90 days to comment and influence their finalization. Based on the live webcast that the SEC held, there will be a lot to comment on.
While the JOBS Act and crowdfunding itself is controversial on its own, the proposed rules are sure to bring a lot of heat on to the SEC. While some will say they are too invasive, others claim that they do not provide enough protection for the parties involved. The rules not only specified the requirements for participating investors, but also outlined additional requirements for intermediaries -- those that facilitate the offering of securities -- in order to create an infrastructure that is as transparent as it is secure. These requirements include specific conditions such as "provide communication channels to permit discussions about offerings on the platform" to more vague obligations like "take measures to reduce the risk of fraud."
The SEC has to maintain a fine line between providing enough freedom to those involved in crowdfunding in order to actually facilitate capital creation and also providing enough protection to sustain a healthy environment for these transactions. Currently, the rules proposed seem to put the portals that will facilitate these offerings in a precarious position in terms of obligations and liabilities. Offloading all of the responsibility and risk of crowdfunding onto those who facilitate it will have the exact opposite effect than the one the SEC is aiming for. This is something they will undoubtedly hear multiple times over the next 90 days as the rules are being commented on.
The important aspect of the SEC opening up this discussion however, is that it marks long awaited progress in terms of implementing the biggest section of the JOBS Act. As with any industry-changing regulations, there will be nuances and propositions that may not be as effective as it seems on paper. This is why it is vitally important to make our voices heard over the next 90 days. This way, the crowd can shape the regulations in a way that will be both financially beneficial and legally secure. The ball is finally rolling and it will be up to early adopters and industry leaders to build a solid structure for the rest of the players to dive into.
Similar to when Title II regulations came out, the burdens of bureaucracy that the SEC laid out (in the case of Title II, investor accreditation liabilities) was lifted by private, third-party companies that saw a need and provided a solution. Companies like CrowdCheck assist with due diligence while companies such as Crowdentials streamline the process of accrediting your investor. In a similar vein, once the dust settles with Title III regulations and there is a need in the marketplace for compliance assistance, it will be advantageous for these same companies to adapt and provide more solutions to lift the burden of red tape.
The private equity field has been bracing for a shake up and it is finally here. The rules are a bit murky and some of them seem to be far reaching, but the next 90 days will help alleviate some of that. What is more important is the introduction of this new industry that is sure to positively impact capital creation once it goes into effect. These are historical pieces of legislation that all of us can directly influence in positive ways and that is exactly what we should strive to do.