It was born with great flourish in the spring of 2012, passed by Congress and signed by the president and hailed as the wellspring of new companies and jobs as the nation sought to emerge from the Great Recession. In fact, with a marketer's touch in a presidential election year, it was even called the JOBs Act.
Now after a nearly four-year wait for a recalcitrant Securities and Exchange Commission to adopt the rules required to implement the intent of the Jumpstart Our Business Startups Act to allow businesses to raise up to $1 million a year from a large number of small-equity investors, the rules are set to go into effect May 16.
Meanwhile, more than half of the states, tired of waiting for the SEC to act, have adopted their own versions of what is known as crowdfunding, which is largely expected to be Internet outreach to large numbers of potential investors by entrepreneurs seeking capital.
Because of SEC rules in effect under the Securities Act of 1933, the states' legislation limits fund-raising to residents in the state where the business is located.
And with the arrival of federal crowdfunding comes a growing concern that the crowdfunding laws of the various states may be rendered "impractical" since those who use the Internet or social media, the logical tools to reach a "crowd" of prospects, must ensure no one in another state can see the offering.
Washington was one of the first states to enact legislation to permit crowdfunding, with many of those testifying during the Washington Department of Financial Institutions' rule-making process suggesting entrepreneurs would be queuing up to look to crowdfunding to raise money.
But despite that expectation, in the 15 months since DFI enacted the rules and the law went into effect, only two businesses have filed to raise money in this state via crowdfunding. In fact, according to DFI Director Scott Jarvis, only 100 companies around the country have used intrastate crowdfunding to raise capital.
Thus given that there is no line of entrepreneurs forming to seize the crowdfunding opportunity, there is no certainty how much demand there will be for the opportunity to raise money through crowdfunding once entrepreneurs have a choice between federal and state rules. The federal will allow businesses to raise money from investors anywhere in the country rather just in their home state. Using state law requires entrepreneurs to only raise money intrastate.
One reason for slower-than-anticipated interest could be that the resurgent economy has made it easier to raise money through traditional funding sources, suggests Joe Wallin, a Seattle attorney with Carney Badley Spellman, who basically wrote the state legislation that was passed two years ago.
"The ebb and flow of the economy may impact the ability of entrepreneurs to tap traditional sources of capital so at some point, if not right away, the crowdfunding approach may become more popular," he said.
And now comes the likely additional deterrent to intrastate crowdfunding with the warnings about Internet use to advertise the offering, since the advertising may only be to residents of the state in which the offering is made.
According to the SEC's directive, if someone in another state sees the information on the offering, it is no longer intrastate, which would basically nullify the fund-raising effort.
In one of the most thorough examinations of the new role of states in the crowdfunding phenomenon, Faith L. Anderson of the state DFI's Securities Division, describes as "draconian" the fact that rules "do not provide any relief for insignificant deviations" from the advertising limitations.
"A single out-of-state sale will void the exemption (for the entrepreneur raising money via intrastate crowdfunding) and result in an unlawful offer or sale of securities in the absence of another available exemption," she wrote.
Anderson's comments are part of a report she produced for securities departments of all 50 states as chair of the Small Business/Limited Offerings Project Group of the National Securities Administrators Association.
Anderson's document to her peers is designed to explain the strengths and weaknesses of both federal and intrastate crowdfunding options. But her focus on the challenges the SEC rules pose to intrastate offerings includes the comment that the combined effect of federal rules "is to severely restrict an issuer's ability to take advantage of state crowdfunding provisions that are premised on these federal provisions."
But the SEC staff has said the agency is considering amendments that could make Internet use possible.
"There is no timeframe by which the SEC may finalize the proposed amendments to Rule 147 (the rule that has raised a number of concerns for intrastate crowdfunding)," Anderson said in an email exchange with me. " In fact, they may never as they do not have a Congressional duty to act in this regard."
And Wallin added: "Unless it makes the changes being suggested for use of the internet in intrastate crowdfunding, the SEC is tamping down a nascent but important opportunity to cultivate local funding and entrepreneurship ecosystems before they even have an opportunity to develop."
But Wallin notes he is "optimistic that whatever the SEC finally decides, the state can figure out...maybe through new rules or amendments."
And Anderson closes her briefing to peers with: "As we learn what works and what doesn't from the viewpoint of entrepreneurs and small business owners, states and the SEC may make further adjustments to their crowdfunding rules."
Thus there seems to be optimism that what Congress launched with the right intent, but watched while the SEC dithered for almost four years, may still produce an opportunity for entrepreneurs to create jobs rather than being jobbed by thoughtless regulations.