What’s eating the SEC? The SEC’s delay of the Jumpstart Our Business Startups Act (or JOBS Act) is unconscionable and a major obstacle for small businesses and lean start-ups in search of alternatives to the strict terms of banks. How long must we wait for the regulations to be put in place so that the JOBS Act is the law of the land?
The passing of the exemption in the JOBS Act is generally regarded as adding a sense of security to crowdfunded platforms (CFPs). The key statistics of crowdfunding show that the JOBS Act would be a boost to the economy, but without those certainties, we are only witnessing a fraction of the uplift that CFPs could provide.
By mid-2012, those earning over $100,000 per year were the most likely to invest in startups through crowdfunding, according to the American Dream Composite Index. And according to last May’s Crowdfunding Industry Report, CFPs grew at a 63 percent compounded annual growth rate over the last three years.
All told, crowdfunded campaigns launched in 2012 raised 20 percent more on average than they did in 2011. Further, the campaigns grew shorter in 2012 meaning that it’s getting easier to raise money through CFPs. And this year, crowdfund pledges are expected to double.
While the majority of CFPs operate in Europe and North America, it is now a global phenomenon. CFPs are not just good for the American economy; they are good for the global economy. Over 90 percent of countries in the world backed a crowdfunding project last year. There are crowdfunding platforms in places like Estonia, and at least six in New Zealand. 2012 was, quite frankly, not just the year of crowdfunding – it was the year that crowdfunding finally went global. As of April 2012, 452 CFPs were operating globally.
So why is there a delay by the SEC, which missed its end-of-2012 deadline, to put provisions of the JOBS Acts in effect for CFPs? A lot of it is due to the departure of the previous head of the SEC and her two deputies, who managed the office charged with writing these regulations. There is strong desire at the SEC to get these regulations right in a potentially revolutionary new sector, one fraught with the possibilities of fraud and default, after the Great Recession.
But in Australia, which legalized the crowdfunding industry seven years ago, there has not been a single incident of reported fraud, according to the Crowdfunding Professionals Association (CfPA). CFP default rates in the UK, where the crowdfunding industry has been legal since last year, are between 1.4% and 4%—very low indeed.
This is not to say that bad things don’t and will not occur. It is only to say that there may be some over-exaggeration on the part of those who would regulate.
The CfPA, to their credit, is trying to pick up the SEC’s slack and make an argument that CFPs are not credit default swaps or weapons of mass economic destruction.
“[The CfPA has] recruited more than 800 crowdfunding companies to join the CfPA, which promises to uphold the highest industry standards, to require background checks for entrepreneurs and education for investors,” according to Laura Braverman in Forbes. The CfPA has also compiled data of global crowdfunding practices and are working with the Consumer Federation of America to draft appropriate protections.
Until the Senate confirms Mary Jo White, the President’s nominee for the vacant SEC post, we are stuck in limbo regarding the full potential of crowdfunding. That isn’t necessarily a bad thing (the platform is still going gangbusters), but it leaves a certain sense of phantom uncertainty, which is almost certainly depressing the potential of this economic uplift.
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