Securities fraud is as American as apple pie.* 1 Preventing securities fraud has been a priority of federal and state governments since before the 1929 stock market crash.2 The Securities Act of 19333 (the Securities Act) and the Securities Exchange Act of 19344 (the Exchange Act) were passed, in large measure, to reduce the potential for fraud associated with the initial issuance and subsequent sales of corporate stock and other securities to the general public. The time and cost involved with "going public" are considerable and can be prohibitive to most start-up companies.5 To provide some relief to smaller companies wishing to raise investment capital, the securities laws were relaxed in several particulars,6 but still were not considered easy and flexible enough. In an attempt to further simplify the costs and reporting requirements for honest small companies seeking to access the capital markets, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act of 20127 into law on April 5, 2012. The stated purpose of this legislation, which consists of seven separate titles, was "[t]o increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies."8 Congress designed the Act to increase the ability of small businesses to access capital and thereby generate more jobs.9 While innovation can be found in all types of companies, large and small, some believe it makes sense to tailor some of those policies to high-growth start-ups that have both the will and the way to grow.10
Entrepreneurs have long sought to benefit from the Internet's promise of empowering individuals at the expense of gatekeeping intermediaries. Many industries have been devastated by such disintermediation, including newspapers, retailers, cable television providers, and music retailers. Could the securities industry's control over initial public offerings be next? Entrepreneurs salivate at the idea of raising small amounts of money for their commercial ventures directly from the masses over the Web. While federal securities laws provide for several abbreviated types of filings for small offerings, critics complain that the federal oversight is still too onerous and allows access primarily to the well-heeled. Why, they say, should the little guy be cut out of the opportunity to get in on the ground floor?11 Enter the JOBS Act. This law purports to go along with the entrepreneurial point of view, giving a stamp of approval to crowdfunding, the direct raising of small amounts of money from numerous individuals over the Internet. Fearful that loosening the standards from the current small offering rules could result in losses due to fraud or investor ignorance, Congress provided many provisions to address these fears and left considerable discretion to the Securities Exchange Commission (the SEC). The SEC was given a December 31, 2012 deadline to develop guidelines; a deadline it has missed.12 This article will discuss the evolution of crowdfunding, the provisions of the JOBS Act, and issues causing the SEC to take the slow road.
II. The Crowdfunding Provisions of the JOBS Act13
Picture a thief who walks into an old time country store and steals a log of salami sitting on the counter for customers to sample. That action would immediately result in a commotion. Compare that to someone who came in every day and cut off a slice and ate it; result-no big deal. The computer age equivalent is appropriately known as the "salami technique" - slicing off extremely small sums from the accounts of numerous victims who would not even recognize that they had been victimized, or if they did, would not bother to report the insignificant discrepancy.14
In the early days of the Web, many businesses, such as online newspapers, were excited about the possibility of raising large sums from small charges to many users; they called this concept micropayment. …