For the past year or so, we have been discussing various forms of “crowdfunding” on these pages, especially “investment crowdfunding” -- the use of crowdfunding to raise capital for an emerging business or to finance the development of a new, perhaps cutting edge product or technology, with the investor receiving equity in the enterprise or some form of debt security promising an income stream and repayment at some future time. In most cases, investment crowdfunding involves raising capital from numerous, typically small, investors. Because this form of crowdfunding involves the sale of securities, the arrangement is subject to the various securities laws, rules and regulations that apply to any offer and sale of securities.
Although state laws are also implicated in the sale of securities, the primary focus has been on the legislative and rulemaking efforts at the federal level. To that end, the Securities and Exchange Commission recently closed the comment period on its proposed rules to implement the Jumpstart Our Business Startups (JOBS) Act. We and others have noted that the SEC’s rules are overdue. With the comment period on the SEC’s rule proposal having closed in February, everyone is now anticipating what will happen next. Will it be final rules, a revised proposal (extending the notice and comment process and further delaying final rules) or some combination thereof? No one is really certain (although the Internet, as usual, is rife with speculation).
The lengthy process from legislative mandate to formal rule proposal to final rules necessarily results in a slow, methodical procedure, but many have been especially critical of the SEC’s slow pace in this particular area. Some of that, no doubt, is attributable to the fact that in the lightning-paced world of the Internet, those most interested in participating in any new online activity are naturally impatient. But a perusal of the comments available on the SEC website, or a reading of any number of articles, indicates that many simply think the SEC’s is dragging its heels because it is overly concerned with the need to protect investors, or that it is really trying to protect accredited investors and/or traditional financial institutions from competition. Others complain that compliance with the proposed regulations will be too expensive, and that the need for things like audited financials is overstated.
While the sentiment behind some of those comments is perhaps understandable (even if some commenters are remarkably uncircumspect in how they express their views), there is one point that seems to get lost in the shuffle - long before there was an Internet, investors, especially less sophisticated small investors (even those with a lot of money), were falling prey to sharp operators offering “pie in the sky” investment opportunities. In fact, a film about one of these sharpsters - The Wolf of Wall Street - was recently nominated for a number of Oscars. The anonymity and ability to reach broad audiences from remote locations that the Internet provides makes such nefarious activities exponentially easier and quicker to complete. This is, no doubt, the SEC’s biggest concern.
By no means are we advocating waiting quietly and without remark until the SEC finishes its work. Like any busy organization with a lot on its plate, if an issue is not generating noise the SEC is likely to focus on one that is (squeaky wheel getting the grease and all that). But it bears consideration that one of the principal reasons the SEC is being careful with what it ultimately permits, and with what it ultimately requires in terms of registration, licensing, public disclosure and investor protection, is because of an understanding that, while there are a lot of really good people out there looking to use investment crowdfunding for really good things, there also are a lot of really bad people with other ideas. As with every marketplace, this one needs legitimate, focused, well-considered regulations that protect investors, those raising funds, and everyone else participating. It will do no one any good if such rules are not implemented right from the start.