Crowdfunding not number one on SEC’s to-do list

Well, as we’ve already pointed out, it will not be legally or logistically possible for the SEC to have its crowdfunding regulations in place by December 31. Some commentators have speculated that we might get the proposals December. Or January. All I can say with respect to timing is that at a tribute dinner on Thursday night I was sitting next to an old SEC friend who had recently had cause to go through some memos that I had written when I was a young SEC staffer, confidently predicting that we would have draft proposals to present to the Commission within a matter of weeks. Those proposals were eventually presented to the Commission two years later.

I don’t want to scare anyone and we’re not looking at anything like two years here, I’m sure. But after spending some time with the Staff at the SEC’s Small Business Forum and the ABA Business Law Fall Meeting last week, I think we need to get a few things into perspective. Sitting here in our crowdfunding bubble, we focus on the fact that we need those regs to get out and recreate the capital markets, and crowdfunding regulations are the most important thing in the world for us all right now. But they aren’t the most important thing for the SEC, and you know what? They shouldn’t be.

Remember the financial crisis? Remember when a big money market fund broke the buck? That’s still not fixed yet, and although some folks (such as the money market fund industry) reckon we don’t need new regulations, the Financial Stability Oversight Council reckons we do, because a run on money market funds would be REALLY BAD, and the SEC hasn’t been able to successfully formulate those regulations yet. You couldn’t blame the SEC for thinking that preventing problems that caused the old system to break might take priority over creating a new system.

And there are still many rules under the Dodd-Frank Act to be issued. Our friends at Davis Polk keep a very useful summary, updated monthly, of the status of the many Dodd-Frank rules. See page 5 for the status of the SEC’s 95 rulemaking projects. One third completed.

One of these pending Dodd-Frank rules directly affects 506(c) and crowdfunding offerings. This is the “bad actor” rule (now 18 months past its deadline). Section 926 of Dodd-Frank requires the SEC to issue rules preventing felons from making Regulation D offerings. This is clearly relevant for new 506(c) offerings and you can imagine how relevant it would be to the background check requirements in Title III of the JOBS Act. Corporation Finance Director Meredith Cross said at the Small Business Forum that the bad actor rule needs to be done before 506(c) and crowdfunding.

So we have systemic and procedural issues that have to be addressed before we can have our regulations. It’s hugely frustrating and some of us are risking a fair amount on the creation of our new market. But we just have to remember that the new market has to fit within a vast and complex regulatory system that has still not recovered from a systemic shock.

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