Don’t hold your breath for crowdfunding to revolutionize the way startups raise money. That’s the warning from U.S. Securities and Exchange Commission member Daniel Gallagher, one of the key regulators working on rules.
The promise of crowdfunding has been stifled by red tape imposed by Congress, which the SEC must consider, Gallagher said Friday in comments prepared for a speech in Nashville.
“Crowdfunding is 1970s East Germany,” the Republican commissioner said in remarks for a conference at Vanderbilt Law School. “The heavy hand of the state is omnipresent and smothering.”
Technology firms, business lawyers and consultants rushed to develop fundraising portals and support services for equity crowdfunding after the 2012 Jumpstart Our Business Startups Act directed the SEC to create rules for it. While portals such as KickStarter Inc. enable entrepreneurs to raise money for new products, companies aren’t yet allowed to exchange that cash for a stake in the venture.
The SEC took its first step to allow such investments in October 2013, when it approved a proposal in a unanimous vote. The plan has been in limbo ever since, with advocates arguing that the requirements are too costly for small businesses.
Lawmakers made the SEC’s task more difficult when they mandated many requirements for online portals that advertise the shares and imposed disclosure rules on small businesses raising small amounts from crowdfunding, Gallagher said Friday.
“The wisdom of the crowd has been displaced by the all- knowing Washington book club,” he said.
SEC’s Plan
Under the SEC’s plan, companies would be limited to raising a maximum of $1 million per year, and those wanting to raise more than $500,000 would have to provide audited financial statements to investors. The rules also require that firms provide investors with a business plan and describe the business experience of directors and officers.
Critics say the online offerings will result in many failed ventures, fraud and frustrated small investors. The shares won’t trade on a regulated exchange, meaning investors may have difficulty selling.