Today the SEC formally proposed rules on equity crowdfunding, a mechanism through which private companies would be able to raise small amounts of capital from ordinary investors. This is based on a provision in the JOBS Act legislation signed by President Obama in March 2012, which included a requirement that the SEC issue related rules by the end of last year.

But there were no such rules issued, in part due to Schapiro’s personal antipathy toward crowdfunding. She essentially took the law into her own hands, crumpled it up and threw it in the trash.

Mary Jo White promised to rectify this situation during her Senate confirmation hearings this past spring, and today’s proposal makes good on that pledge. What makes the delay even more galling, however, is that the proposed rules appear to be carbon copy of the 19-month old JOBS Act. In fact, it’s a bit hard to understand how even White required so much time to travel such a short distance.

Here are the highlights, all of which are explicitly in the JOBS Act text:

• A company can raise a maximum of $1 million via crowdfunded offerings over a 12-month period.
• Investors can invest up to $2,000 or 5% of their annual income of net worth, whichever is greater, over a 12-month period (if either their net worth or annual income is below $100,000).
• Investment companies would be ineligible to use crowdfunding.
• Securities purchased via crowdfunding can not be resold for one year, except back to the issuer.
• Issuers would be required to submit certain information to the SEC, including about the company’s financial condition, which would be publicly-available. Issuers also would be required to file annual reports with the SEC.
• Intermediaries would be required to provide certain investor education information, and take measures to reduce the risk of fraud.

In fact, so far I can only find a few small items that weren’t in the original legislation. One is a ban on non-U.S. issuers from using crowdfunding, plus a more expansive definition of “investment companies” that would be ineligible. I had been expecting some stringent requirements when it came to intermediaries discouraging fraud, but it seems that they only must ask issuers if they are telling the truth (note to SEC: most grifters don’t admit to being grifters).

[UPDATE: Turns out I was wrong. The ban on U.S. issuers actually is in the original text, making the delay that much more galling.]

Now we need to wait another 90 days before these rules, or some version of them, get voted on. Expect there to be numerous public comments in the interim, which could affect the final language.

My general position on equity crowdfunding has been that it should be safe, legal and rare. Most investors will lose money. Not because of fraud, but because angel investing is extraordinarily difficult. Moreover, the investment caps virtually codify losses, since angel returns are depressed by small, non-diverse portfolios.

But Congress passed this law, in a rare show of bipartisanship. And President Obama put his pen to it. The SEC had a responsibility to move things along and, if it proves problematic, then to inform legislators. Better very late than never.

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