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10 Steps for Obama, the SEC and FINRA to Implement JOBS Act Equity Crowdfunding

10 Steps for Obama, the SEC and FINRA to Implement JOBS Act Equity Crowdfunding

Editor's Note: The following post comes to us from David Drake, a founding board member of Crowdfund Intermediary Regulatory Advocates or CfIRA. Also see Drake's previous posts, which deal with education, fraud protection, transparency and creating a whistleblower programadvertising and investment advice, and consumer protection, and our discussion of the JOBS Act implementation timeline in The Crowded Room.

Crowdfunding for equity won't be ready till Q4 2013 at the earliest and my guess is that implementation will be closer to Q1 2014. Let me walk you through my thinking around this.

SEC Chair Mary Schapiro will resign by year end. No proposal will be submitted until a new Chair is chosen. Granted that Mary was quickly chosen during the financial crisis and there was no lapse in time between Chairs, but Obama will pick a Democratic Chair to end the polarization that has not been endured at SEC Commissioner level for over 30 years. Yes, there have been factions and there certainly has been friction.

Regardless, Obama also has a number of other matters in play during this period as he has to pick a Treasury Secretary, deal with the Fiscal Cliff and get inaugurated at the end of January.

So, here is my view of what’s got to happen before we see crowdfunding for equity implemented in the US. I’ll list the steps I regard as key interspersed with some thoughts on key implementation points.

Step 1. The Announcement—at the earliest, a new SEC head will be announced in the last week of January, though the announcement could come as late as March.

Step 2. Ratification—the Senate (which is controlled by Democrats), not the House (controlled by Republicans), will approve Obama's choice.

SEC Commissioner Elisse Walter was the interim Chair last time and is close to Mary Schapiro so she would be the interim Chair until a new Chair is confirmed.

Meanwhile the SEC staff has been surprisingly helpful and open in interactions with CFIRA (Crowd Fund Intermediary Regulatory Advocate), founded from the Crowd Funding Intermediary Regulatory Association, since we first sat down with them Friday April 20, 2012. They certainly have drafts they have been polishing the last six months and both Trading & Markets and the Division on Finance have been very accommodating as we have worked through all scenarios with them during more than several dozen meetings over the last 7 months.

Step 3. Say the new SEC Chair comes in Feb. 15 - he/she would need 30-45 days to review operations,
Step 4. and another 30 days to set up the proposal to be voted on by the SEC Commissioners, then we would be around May 1st.

Step 5. 90 days of public commenting would take us to August 1.

Step 6. It would take more days for the staff at the SEC to summarize all the proposals and circulate memos on suggestions to the Commissioners.

Step 7. After Labor Day the SEC Commissioners would set up a time to vote on the proposal as a final ruling. This puts us out to Oct. 1st.

Of course, these assumptions are based on past inner workings and results by the SEC and if we review the last 7 months the above will not meet any of our assumptions and deadlines. If Elisse Walter becomes the Chair, and not the interim leadership role, then we can see these dates being made as she is certainly ahead of the curve.

So, October 1st—give or take 15 days—is the best scenario for a ruling on crowd funding for equity.

Steps 8, 9 & 10. And then we are not finished. FINRA has been as quick as 30 days to implement SEC rulings but some have taken years.....

FINRA, the private police extension of SEC, will have to undergo its own process of proposals, commenting and rule making. That takes us into 2014 before we will see strong and swift progress.

The clock will start ticking when a new Chair of SEC starts work. Now we can only hope to keep all the balls rolling and all the conversations continuing with SEC and FINRA so there are fewer unknowns. Politics and new SEC leadership is pending and must take it's due course—CFIRA, SEC and FINRA are doing hard work and we in the industry have appreciated it. This current bottleneck is just a time of patience as our work continues.

What do you think? I challenge you to comment.

- In addition to his role on the board of CfIRA, Drake is also co-founder of The SoHo Loft series of events on capital creation and crowdfunding. He is a partner at LDJ Capital.

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  • Guest Salvador Briggman Nov 25, 2012 09:16 pm GMT

    It's obviously disappointing, but I can't say I'm surprised with the large delay. I think everyone agrees the most important thing is to establish a set of regulations that will protect investors but not stifle the ability of entrepreneurs to raise capital. As an entrepreneur, it does scare me when I read articles like this (not mine):
    Hopefully, the SEC will be able to form a balance between capital formation and regulation.

  • Paul Spinrad Paul Spinrad Nov 27, 2012 09:13 pm GMT

    David Drake says:

    > If Elisse Walter becomes the Chair, and not the interim leadership role, then we can see these dates being made as she is certainly ahead of the curve.

    Indeed, it now looks like Steps 1-3 can be skipped-- so that's nice news timeline-wise.

    Also, re: the comment period (Step 5) taking 90 days for crowdfunding under Title III of the JOBS Act of 2012, another precedent to consider is that the 506(c) general solicitation rules (Title II of the JOBS Act) were given a 30-day comment period. So if Title III gets the same length window as Title II, that shortens the timeline another couple of months.

  • Guest Kraig Fairhurst Dec 10, 2012 03:30 pm GMT

    I see continued delays even beyond this timeline. FINRA (and the large BDs who govern it) has been at times downright hostile to the concept of Crowdfunding for Equity. Remember folks, this is a DEREGULATION effort here, one that has the potential to democratize the flow of investment capital and place more freedom in the hands of individual investors, aka, the "American Way".

    While I applaud President Obama for having signed this legislation, I don't see consistency in his other administrative and/or legislative efforts that lead me to suppose that he will actively support its implementation, let alone nominate people who will champion Crowdfunding. The Investment Banking industry has invested (read: "campaign donations" here...) too much in seeing the teeth knocked out of Crowdfunding. I give you all the financial industry press regarding the so-called fraud vs. failure debate; they have been quick to muddy the waters between the two concepts, further creating chaos and misunderstanding amongst the middle class - the very people this legislation is designed to help.

    I think the above timeline is very possible, even most-likely. I just think that we need to be prepared for a long, drawn-out battle for implementation. Which is why I have been in constant contact with my congressional delegation, for I believe that therein (oxymoron?) lies the tipping point in getting equity Crowdfunding implemented.

    Just my $0.02...

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