|wonderful piece for the New York Times about specific individuals who are this very day doing the clever, innovative and important work of making investment crowdfunding a reality in America. The entrepreneurial financiers Amy profiled include Ryan Caldbeck and Rory Eakin, of CircleUp, and Candace Klein, of SoMoLend.
The persistence of these entrepreneurs - in a regulatory landscape inhospitable (to put it euphemistically) to innovations in finance for regular Americans - is to be lauded, and supported. They are working on filling the financing gap for small business growth, a function Jonny Sandlund has shown is no longer served by conventional bank lending.
Regulatory constraints and the promise of the JOBS Act
We know that small, growing businesses are the engine of all net new job growth, and we also know small, growing businesses are starved for capital. Imagine the full impact CircleUp, SoMoLend and others might have on the broader US economy, were these financial innovators not artificially constrained by laws that restrict investment to accredited investors and institutions.*
The JOBS Act was supposed to change this.
When he signed the legislation last year, President Obama said that the crowdfunding piece of the JOBS Act, Title III, would permit small business to access a new source of investment. He identified that new source of capital as "the American people."
As Amy prominently notes in her article, many who hope to see the President's statement become a reality are frustrated with the SEC's delay in circulating the regulations to implement Title III.
The fault lies not in SEC intransigence, but in the enabling legislation
I'm sorry to say that the hopes being placed on prospective SEC regulations are based on a false promise. There is little point in pushing the SEC, because Title III of the JOBS Act imposes constraints on crowdfunding which no set of regulations can fix.
It's not a matter of whether the SEC is willing to write workable rules. It's a core issue of administrative law, that regulations be delimited by the frame of enabling legislation. Whether SEC staffers are not friendly to investment crowdfunding, or are friendly, they cannot write implementing rules that contradict the imperatives of Title III.
Three things broken that rulemaking can't fix - Three things in the investment crowdfunding portion of the JOBS Act are broken and cannot be fixed by regulation. Repairs will require new legislation.
#1 - Title III of the JOBS Act takes the crowd out of investment crowdfunding
Representative Patrick McHenry's successful, bi-partisan investment crowdfunding bill didn't make it into the JOBS Act. It's a shame because, had it shaped the final legislation, at least one provision of the McHenry bill would have given sympathetic rulemakers a chance to keep the "crowd" in crowdfunding.
#2 - Funding portals aren't allowed the same flexibility to innovate that online angel platforms enjoy
To truly grasp how grudging Congress was about letting average Americans participate in the innovation economy, leave Title III and move back a title. In Title II, pertaining to accredited crowdfunding, Congress says that online angel platforms may offer, sell, purchase or negotiate with respect to securities, and may permit general solicitation and general advertising, all without requiring registration, as long as a few requirements are satisfied.
#3 - Title III of the JOBS Act is too intrusive of investor privacy
Title III of the JOBS Act puts investment crowdfunding in a privacy conundrum. In a well meaning attempt to protect investors by limiting how much they can risk in crowdfunded deals, the legislation requires funding portals "to ensure that no investor in a 12-month period has purchased securities . . . that, in the aggregate, from all issuers, exceed the investment limits."
We need to stop wasting time pushing the SEC to write regulations to implement legislation that on its face isn't viable. We need to build on the efforts of the heroes Amy Cortese profiles in her NY Times piece and ask Congress to address the financing crunch small businesses are facing.
One way to do this is to give the American people an opportunity to crowdfund investment dollars. That means leaving the comfort zone of state securities regulators and giving trailblazers ample room to iterate solutions.