SEC Forum to Discuss Potential Regulations on Equity Crowdfunding and Other Trends

On November 15, the Securities Exchange Commission (SEC) will host the "SEC Government-Business Forum on Small Business Capital Formation," an annual forum focused on the capital formation concerns of small business. This year's agenda will focus on the implementation of the Jumpstart Our Business Startups Act (JOBS Act), specifically equity-based crowdfunding regulation. The forum also will look at issues related to capital for small business that were not addressed by the JOBS Act.

Free to the public, the day-long forum will start at 9:00 a.m. ET with a morning panel discussion that will be webcast live on the SEC's website. A panel of experts will discuss the implementation of the JOBS Act and small business capital formation issues not addressed by the JOBS Act. During the afternoon breakout sessions, participants will have the opportunity to join a crowdfunding-focused breakout group via a teleconference intended to help formulate specific policy recommendations for the implementation of equity-based crowdfunding regulations. To participate in the teleconferences, either in person or by teleconference, individuals must register online by November 12.

Originally slated for August, this forum marks the first opportunity for the public to gain insight into potential federal regulations of equity-based crowdfunding since late August when the SEC released its first proposed rule that would allow the general solicitation and advertising of crowdfunding securities (Title II of the JOBS Act). However, a lack of definitive knowledge on SEC regulation has not stopped activity in the nascent industry and speculation on the possible impacts of SEC regulation.

In an article for thecrowdcafe.com, Jonathan Sandlund points out that at least 12 crowdfunding platforms recently have established partnerships with existing broker-dealers, those entities already regulated under the SEC, to launch crowdfunding platform targeted specifically at accredited investors. These portals are set to launch upon implementation of Title II of the JOBS Act, which Sandlund and others believe should happen by the end of 2013.

Another emerging trend is growing concern over when the sale of equity-based crowdfunding securities to non-accredited investors (i.e., the crowd) via online portals (Title III of the JOBS Act) will be implemented and the economic feasibility once implemented due to proposed regulation. Sandlund and others believe that Title III may not be implemented until late 2014, the final deadline for the JOBS Act to be enacted. In an op-ed for CrowdfundingLaw, Mark Mohler — CEO of the crowdfunding website Sprigster — discusses the economic viability of crowdfunding for unaccredited investors due to the possible regulation of funding portals. If regulations effectively require funding portals to be registered broker-dealers and $1 million dollar capped rounds, the huge cost of compliance will necessitate individual investments of more than $2,000 limiting the number of unaccredited investors that can contribute to an individual startup, according to Mohler.

Academic research by securities law experts including, Stuart Cohen from the University of Florida and C. Steven Bradford from University of Nebraska, may confirm Mohler's assertions. Bradford discusses the potential for the regulatory cost of selling securities through crowdfunding to be prohibitive due to crowdfunding sites having to be registered as broker-dealers. Cohen concludes the newly created exemption is fraught with regulatory requirements that go beyond even existing exemptions and raise transaction costs and liability concerns that may substantially reduce the exemption's utility for small capital raising efforts.