By Tim Devaney - 01/16/14 02:35 PM EST
The Securities and Exchange Commission's (SEC) crowdfunding rules for raising small amounts of money online are a “deal-breaker” for most small businesses, House Republicans said Thursday.
"For a startup that has little capital but a promising idea — the type of business for which crowdfunding was designed — having to pay tens of thousands of dollars in compliance costs in order to access capital is an immediate deal-breaker," Rep. David Schweikert (R-Ariz.), chairman of the small-business subcommittee on investigations, oversight and regulations, said at a hearing on the SEC's new rules.
The practice once violated securities laws, but Congress carved out an exemption for crowdfunding in 2012 and placed the SEC in charge of regulating it.
"However, the SEC did not follow this path," Schweikert said.
The SEC came out with a list of proposed rules last November, which led to calls from the small-business community that compliance measures were too difficult to meet and rendered the crowdfunding law useless.
At issue is a requirement that small businesses seeking to raise more than $500,000 in a year provide the SEC with audited financial statements, which for many of these companies would be difficult to pay for and pull together.
"Unfortunately, the rules, as currently proposed, choose overregulation instead of a sensible approach," Schweikert said.
Legislators are also considering whether to raise the $1 million cap on how much money a small business can raise through crowdfunding each year.
But some financial reform advocates say the SEC should be more concerned about protecting investors. Mercer Bullard, an associate law professor at the University of Mississippi, called on the agency to "step it up a little bit."
"They are going to be a lot of losses, and who are the people who suffer those losses going to be?" he testified.
Schweikert said he was also disappointed with the SEC's "sluggish implementation" of the crowdfunding rules. Congress passed the law in April 2012, but the SEC didn't come out with the proposed rules until November 2013.
"Since then, we have been waiting for the SEC to implement this portion of the law," Schweikert said. "After a year and a half, and over a year late, the SEC brought us a complex and overly-burdensome 585-page set of proposed rules that threaten crowdfunding's usability for small businesses."