12/10/2014 03:58 pm ET Updated Feb 09, 2015

SEC Holding Crowdfunding Hostage

The SEC is blocking small business' access to funding and delaying job creation. Congress passed Title III of the Jumpstart Our Business Startups Act, commonly known as the JOBS Act, in 2012 and ordered the SEC to write rules for its implementation by January 2013. The SEC is more than two years late and businesses are suffering as a result.

With $18 trillion dollars in IRAs that could be invested in job-creating small businesses, the SEC's foot-dragging delay is weakening the ability of small businesses to raise capital. Its attempt to protect unaccredited investors from access to IPOs (Initial Public Offerings) of small and medium size businesses is misguided in the Internet age.

Crowdfunding is what the JOBS Act Title III is all about. It allows individuals to buy into IPOs of small-cap companies directly, far earlier and likely at a lower price than if you waited for a broker-dealer to underwrite an offering. If you have a company, even a start-up, it provides an avenue to attract investors, even for seemingly high-risk deals.

If you are a bank, you may soon find innovative ways to combine government guarantees with crowdfunding to reduce risk in making loans to companies you historically wouldn't approve.

Obtaining start-up financing for a new venture has long been monopolized by the financial industry. While small businesses have always been the major job creators in the economy, they have been blocked from more easily raising funds by an archaic pre-Internet system of 1930's securities laws fiercely maintained by existing powers in the finance industry. Crowdfunding will disintermediate some players and they are scared. The SEC seems to be listening them, rather than Congress and the public.

Do the wealthy really have better judgment than those closest to where the rubber meets the road in business? Not so much. Widespread crowdfunding that allows raising money across state lines may be a ways off, but it will allow people familiar with risks of particular businesses to buy into IPOs.

Broker-dealers often hold deals close and reward their friends at the expense of businesses raising capital. While this is great if you are in the inner circle, it prohibits outsiders from getting in on the ground floor.

Little by little, state-by-state, new legislation such as Title III under the JOBS Act (at the federal level) is changing the way businesses are capitalized. Slowly, legislators are seeing the light, pressured by business owners starved for capital and investors who are tired of being played by broker-dealers. We can't do crowdfunding easily at the federal level yet, but we are getting closer. Some states are dragging their feet, and the SEC is watering down the intent of the law by limiting offerings to accredited investors where the legislation intended a more open opportunity for smaller, non accredited investors to participate, investors that may actually have first hand experience with a business.

The root of the problem lies in archaic classifications of investors derived from the early 1930's securities laws. They make an assumption that accredited investors are more informed than the non-accredited. Before the Internet, this may have made some sense, but no longer. The SEC, a bit of an old-school relic, appears to be attempting to water down the JOBS Act's potential for job creation by monkeying with the definitions of accredited investors. They appear to want to impose their own out-of-date belief structure on a modern marketplace that they may not appreciate has the ability to ferret out information instantly, information well beyond what even accredited investors might find.

That leaves us with the SEC trying to use its rulemaking authority in opposition to the legislative intentions of the JOBS Act, which is to bring more capital into the economy and grow small businesses that create jobs. Is this a poorly masked attempt to preserve the monopoly the securities industry, which is comprised of only accredited investors, maintains under the guise of protecting the poor, uninformed widow who was a victim of the bucket shops of the 1920's? We don't protect gamblers from choosing how to spend their money, so why have we been prohibiting people from investing as they see fit, preventing them from reaping the rewards of investing their resources to strengthen the American economy? Is this another systemic consequence that preserves the separation between the haves and have nots?

Hundreds of thousands of businesses are willing to share their profits with investors, but could never afford the costs of the traditional public offering. These businesses urgently need capital to hire people to expand their businesses.

The existing regulations cut off investing opportunities for the very people who might contribute the most valuable experience solely because they don't have enough assets to be considered accredited investors. This can limit the pool of potential funding sources to a small number of investors who might participate as a group, gaining unreasonable control which may make self-serving decisions that are in direct conflict with the company's (and other owners') best interests.

Those with 401K plans, money under their mattresses, and savings accounts earning next-to-nothing, will be permitted to invest relatively small amounts in stock offered to the general public by public solicitation. While currently only accredited investors can participate fully, we need the flexibility the JOBS Act was created to provide. We need to permit non accredited investors to participate in these IPOs, albeit to a limited degree.

Thankfully, the old-school protectionism for the "incompetent investor" is slowly ending. And so it should. Change is working its way up from the state level to the federal level.

We don't protect gamblers from choosing how to spend their money, so why have we been prohibiting people from investing as they see fit? Shouldn't they be able to reap the rewards of using their resources to strengthen the American economy?