Crowdfunding and the Knights Who Say Ni
In Monty Python and the Holy Grail, King Arthur’s quest is blocked by the Knights who say Ni. The Knights who say Ni place increasingly impossible demands upon King Arthur to prevent him from traveling down the path in the forest, first demanding a shrubbery and then telling him to cut down the tallest tree in the forest with a herring.
What do the Knights who say Ni have have in common with the SEC? Well it appears the SEC is asking investors to cut down a tree with a herring before it moves forward on a rule to implement crowdfunding.
Crowdfunding is a new means for startups to raise capital through relatively small amount of monies from investors. With crowdfunding, a business could raise a million dollars in $10,000 increments from investors who fit specific risk profiles. Under existing securities laws, this type of capital formation isn’t allowed because of the potential risks and various structural impediments. However, in a rare display of bipartisanship, President Obama, Congressional Republicans and Democrats proposed and approved legal changes to allow for crowdfunding under the Jumpstart Our Startups Act (JOBS Act).
With the JOBS Act becoming law on April 5, 2012, the SEC had 270 days to promulgate implementing regulations, a deadline that passed on January 1, 2013. As of today, the crowdfunding regulations haven’t even seen the light of day.
One of the reasons why we have a JOBS Act is simply because the SEC didn’t take the initiative to update regulations that had been on the books for years or address market changes that were developing organically. Now it appears that the implementing rules are being slow walked.
The SEC has a dual mission—protecting investors and promoting capital formation. Crowdfunding sits at the nexus of that mission. It provides businesses with a new and unique form of raising capital. It has been used in other venues and should be given a shot for business startups. However, our capital markets aren’t a free for all, so the necessary protections need to be put in place so that investors can use such a vehicle with legal certainty and not be duped by unscrupulous operators. That is why the U.S. Chamber of Commerce has advocated for moving forward with crowdfunding so long as strong investor protections are put in place.
Unfortunately, it seems for now that the SEC isn’t even willing to point to a path forward. Investors should have a green thumb from counting their return, not because they are looking for a shrubbery to satisfy a regulator. Monty Python and the Holy Grail was a comedy, but capital formation isn’t. With the inaction shown by the SEC, it looks like crowdfunding may be a tragedy in the making.