Check out the on-demand sessions from the Low-Code/No-Code Summit to learn how to successfully innovate and achieve efficiency by upskilling and scaling citizen developers. Watch now.

Disappointing news came out of the SEC meeting yesterday designed to open the way for crowdfunding in the U.S.

Rather than lifting the ban on general solicitation (we’ll explain that in a minute) in order to make it possible for more people to invest in American startups, the SEC proposed rules that would establish various different classes of investors, each perhaps with its own regulations. Needless to say, this move could make it more rather than less complicated for people to invest in startups, erecting new roadblocks rather than clearing away old ones.

Some quick backstory for those of you who assumed crowdfunding would immediately become legal when President Obama signed the JOBS Act into law back in April:

The SEC has been given until 2014 to spell out the specific rules of crowdfunding.

The very first step the SEC needs to take to make crowdfunding not only legal but effective is to change what are called the “general solicitation rules”. The SEC has very strict rules about who can hear about a stock offering and how they can hear about it. The change to those rules will allow stock brokers and dealers to advertise stocks for sale to the public in ways that have not been possible in 78 years (since the SEC was created).

This change is called “lifting the ban on general solicitation”. Lifting this ban will allow private companies to raise money from a larger pool of “accredited investors” now, and in the future (when crowdfunding is permitted), from all investors.

The last important term to understand is “self-certification”. When an investor wants to make an investment in a private company today, the investment banker who sells those shares is required to make sure that investor is accredited — which means they make over $200,000 a year in income or have over $1 million in liquid net worth. How do they certify this today?  The investor signs documents that “self-certify” that they have that level of wealth and understand the investment they are making. This form of “self-certification” is the only way to have a scalable model. Can you imagine if people were forced to submit tax returns or W-2’s? No one would make investments in private companies — way too much Big Brother.

Wednesday, the SEC was tasked with answering the question, “What do issuers need to confirm an investor is accredited?” Rather than stick with the current self-certification path or providing a mechanism for investors to prove accreditation, the SEC said that different investors may need to supply the government with different information based on the “type” of investor they are.

This is concerning because according to the law, there is only one type of accredited investor (again, this is someone with a net worth of at least $1 million or an annual income of at least $200,000). What the new proposed regulation did was make the rules harder to interpret by saying the verification of an accredited investor’s status will change depending on the amount, type of information, and the way in which the purchaser is solicited.

Markets look for certainty before they act. The content of this proposed rule doesn’t provide the markets with confidence but instead creates more questions.

Are you accredited? That should be a yes or no question. Congress gets it. So does the President. By muddying the process, the SEC will make it hard and confusing to implement crowdfund investing but easy for securities attorneys to sue entrepreneurs trying to create jobs.

Uncertainly in markets will likely deter investments and reduce investor confidence. The result of this action will increase capital flows to securities attorneys and NOT to entrepreneurs.

It makes many wonder if the SEC is engaged in a campaign to derail the will of the American people. Last week we wrote an article about The North American Securities Administrators Association (NASAA) listing crowdfunding on its top 10 fraud list, even though in the two years it has been legal in the UK and the seven its been legal in Australia not a single case of successful fraud has occurred.

We have attempted to engage with NASAA and share information with them about the law and how crowdfunding works today in the rewards space as well as in other countries. Unfortunately, our calls and emails inviting them to the table have been met with silence. The crowdfunding industry’s experience with other government entities (including its active engagement with the SEC) has demonstrated that when the crowdfunding industry is able to engage in an open dialogue, the facts of crowdfunding tend to outweigh the vague fear, uncertainty, and doubt that are put forward by people who may be unfamiliar with the mechanics of the social Web.

Congress and the President have signed into law the JOBS Act that will unlock capital flows and innovation for our nation’s entrepreneurs. One just has to wonder if the only jobs that will be created are for securities attorneys due to MORE complicated rules being implemented.

We encourage you to get involved and reach out to the SEC about how this would affect you as an entrepreneur or investor by making public comments here. You can also join industry associations such as the Crowdfunding Professional Association to stay updated and learn how to be prepared within the laws.

Jason Best and Sherwood Neiss led the U.S. fight to legalize debt and equity based crowdfunding, co-authored Crowdfund Investing for Dummies and founded Crowdfund Capital Advisors where they provide strategy and technology services those seeking to benefit from crowdfund investing. 

[Top image credit: Steve Lovegrove/Shutterstock]

VentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative enterprise technology and transact. Discover our Briefings.