Although the SEC missed its rulemaking deadline months ago, legal crowdfunding, or the use of the internet and social media to raise capital, typically from a large number of people and in relatively small amounts, has remained a hot topic. When passed as part of the Jump Start Our Business Startups Act or JOBS Act on April 5, 2012, the exemption from SEC registration for entrepreneurs and businesses using crowdfunding portals or broker-dealers was heralded by President Obama as a "game changer."5 The public response was so overwhelming that it prompted the SEC to release guidance on April 23, 2012, stating that crowdfunding was still illegal and could only be conducted pursuant to regulations which were yet to be promulgated.6 On May 7, 2012, the SEC published further guidance in the Frequently Asked Questions section of its website regarding operating as a funding portal or crowdfunding intermediary.7 Until recently, nothing more had happened with respect to the congressionally mandated regulations, much to the dismay of the entrepreneurial and start-up community.
On January 10, 2013, however, even without SEC proposed regulations in place, FINRA published a voluntary Interim Form for Funding Portals, to allow potential funding portals, the intermediaries between investors and issuers, to provide information to "develop rules that reflect the funding portal community and its business."8 The JOBS Act requires funding portals to be FINRA members. In addition, on March 20, 2013 the American Bar Association Federal Regulation of Securities Committee submitted comments to the SEC regarding crowdfunding. The ABA outlined 15 points it hoped the SEC would adopt in its regulations. Noteworthy issues addressed were the integration of crowdfunded offerings with other securities offerings in both aggregating the issuance amount and the per investor amount, the offering and investment caps and the thresholds for requiring audited financial statements.9
Even more recently, on March 26, 2013, the SEC granted no-action relief to FundersClub Inc., a so-called "accredited crowdfunding platform," which operates a membership-only web portal limited to accredited investors, and an affiliate, which manages the investment funds formed to invest in start-up companies.10 The no-action letter advised that, subject to certain conditions, the SEC would not recommend enforcement action against the FundersClub entities, which currently appear to be complying with an exemption from broker-dealer registration established by Title II of the JOBS Act. While, FundersClub is using a different exemption, practitioners are drawing parallels to the crowdfunding exemption provided by Title III of the JOBS Act. Thus, despite what the SEC may have hoped for, crowdfunding clearly has momentum and is unlikely to disappear anytime soon.