The “game changer,” as President Obama put it in the Rose Garden as he signed the bill, was a provision to allow small companies to “crowdfund” — that is, to sell stock and other securities over the Internet directly to the general public. “For the first time,” the president said, “ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

But it now seems that dawn will break late on this new age of democratic investing. The Securities and Exchange Commission appears certain to miss its end-of-year deadline for issuing regulations to put the provision into effect. And with the departure of the S.E.C. chairwoman, Mary L. Schapiro, and three of her top deputies — including two who manage the offices writing the regulations — some in the nascent equity crowdfunding industry worry that it could be 2014 before their line of business becomes legal.

The delay has frustrated many crowdfunding backers. The 270 days that Congress gave the S.E.C. to write the rules “is not a suggested timeline; it is a Congressional mandate,” said Kim Wales, an organizer at Crowdfund Intermediary Regulatory Advocates, a lobbying group formed in April to represent the new industry, in an e-mailed statement. “The S.E.C. answers to Congress, not the other way around.”

The crowdfunding provision, Title III of the Jumpstart Our Business Startups Act, creates an exception to the general rule that before a company can sell its stock to the public, it must register with the S.E.C., a process of disclosure requiring elaborate and expensive assistance from lawyers, accountants and investment bankers that most small companies cannot afford. Instead, businesses seeking less than $1 million will be able to raise capital online from small investors in a streamlined process.

But the law insists on strong investor protections, and as a result, the S.E.C. must iron out numerous issues concerning how crowdfunding companies, the intermediaries handling the transactions and even investors themselves can operate.

Small businesses, especially start-ups, are notoriously risky; in essence, the S.E.C. is writing rules that will govern a very dangerous game. “It’s actually a significant job to do the regulations in this area, so it was an unrealistic expectation that the S.E.C. would have it completed by now,” said Barbara Roper, director of investor protection for the Consumer Federation of America, which is lobbying the agency on other aspects of the Jobs Act. “I think they have 21 or 22 separate regulations to write.”

S.E.C. employees began accepting comments from and arranging meetings with interested members of the public about crowdfunding shortly after the Jobs Act became law. In those meetings, agency officials “have come in with our white papers fully highlighted, line by line, to discuss it,” said Alon Hillel-Tuch, co-founder and chief financial officer at RocketHub, a crowdfunding site that lets people and businesses raise money through donations or by offering rewards. (Current law allows sites to accept donations or deposits on a product.)

A spokeswoman for Senator Jeff Merkley, an Oregon Democrat who largely wrote the crowdfunding measure, said that the S.E.C. was grappling with the more stringent requirements courts had imposed for conducting cost-benefit analyses when writing regulations. This “has slowed down everything from Dodd-Frank to the Jobs Act,” the spokeswoman, Courtney Warner Crowell, said in an e-mail.

With meaningful data for analyzing equity crowdfunding in short supply, the S.E.C. asked RocketHub and Indiegogo, another donation-based crowdfunding service, to provide information about their operating practices and campaigns they had conducted. RocketHub complied, Mr. Hillel-Tuch said. But Indiegogo did not, said Slava Rubin, the company’s chief executive, because it did not want to share trade secrets.

Mr. Hillel-Tuch said S.E.C. officials also requested help from Kickstarter, another leading crowdfunding site. Officials spoke with a Kickstarter executive in July, but neither the agency nor Kickstarter would comment on the meeting.

Under Title III, companies wishing to sell stock to the public will have to provide information to investors and the S.E.C., including financial disclosures that grow more extensive as the size of the offerings increases. They will be allowed to sell stock only through an intermediary: either a broker-dealer or a specialized crowdfunding Web site, or portal. The intermediaries will have to take steps to ensure that small investors are protected, even from themselves. The law sets a cap on how much a person can invest through crowdfunding in a year, depending on income and net worth.

Advocates for both investors and members of the crowdfunding industry have dissected nearly every element of the legislation. “I think there are probably 25 or 30 legitimately important issues,” said Douglas S. Ellenoff, a New York securities lawyer who is advising some in the industry. “But I think they’ve all been hashed out. They have heard issues from a variety of angles, and I think that the draft proposals are fairly advanced.”

High on the list of priorities for the portals is to make sure they face less scrutiny from regulators than broker-dealers do. “What we’re asking for is the funding portals are viewed as sort of a broker-dealer-lite sort of model, where the mandates for broker-dealers are not imposed on a funding portal,” said Ms. Wales, the crowdfunding lobbyist.

Article source: http://www.nytimes.com/2012/12/27/business/smallbusiness/why-the-sec-is-likely-to-miss-its-deadline-to-write-crowdfunding-rules.html?partner=rss&emc=rss