On Thursday the SEC sent out a press release captioned “SEC Seeks to Halt Scheme Raising Investor Funds Under Guise of JOBS Act.” The action doesn’t really have anything to do with the JOBS Act, as in the sense that it seeks to set the boundaries of the JOBS Act or otherwise interpret its provisions. Rather it alleges blatant garden-variety securities fraud where the defendant made statements to investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. Some believe the SEC is trying to signal that it is going to be vigilant on JOBS Act fraud. For the rather amusing defendant’s side of the story and other interesting analysis, see this Bloomberg Businessweek article.
One lesson that those intending to enter the market legally can learn is what you put on your web site can and will be used against you by the enforcement authorities. As of today, the defendant’s web site is still operational and is a case study in what not to do.
On a more positive note, the Wall Street Journal reported that AngelList is rolling out a long-anticipated accredited equity crowdfunding service to its users this week. To date, the service has been available to a handful of companies, by invitation only, since December 2012. The service is now available to any qualifying startup or “top-tier” accredited angel investor using the site.
The SEC announced the agenda for a meeting of its Advisory Committee on Small and Emerging Companies on Wednesday, May 1. While some believe JOBS Act topics will be discussed, the agenda is rather opaque and states “the presentations and the discussions are expected to cover a wide array of issues regarding small and emerging companies, such as capital formation, securities trading, and research and offering communications.”
But many are anxious for final and proposed rules without much guidance from the SEC as to when this will occur. The CrowdCheck Blog urged everyone to be realistic by stating “While some commenters on the SEC JOBS Act comment section have resorted to unproductive heckling of the SEC to get a move on, the rest of us understand what is at stake for crowdfunding and the need to get the rules right.” CrowdCheck says it does the basic “due diligence” that a reasonable person would do when investing small amounts of his own funds, and lets investors see the results of this due diligence in an easy-to-understand report. There appears to be an adult lawyer or two in charge of this operation.
CFO.com has an interesting article on “How Venture Capital and Crowdfunding Can Coexist.” The theme is perhaps crowdfunding can be used to fill gaps in a venture funded company’s funding plans. It raises the specter of venture capitalists being scared off by complex capital structures with thousands of shareholders.
Prof. Manning Warren discussed potential civil claims against crowdfunders in a guest blog at Insider Louisville and the strict liability provisions of the JOBS Act. He notes “In addition to all other state and federal liability provisions, the JOBS Act creates a special new cause of action against companies that want to crowdfund themselves. The new law imposes liability for any false or misleading statements or omissions made in any oral or written communications to investors. Investors wanting their money back, plus interest, can file their lawsuits and win their cases without proving that the company had any intent to deceive them and without proving that the company actually caused their losses.”
Finally, while we’re on the dreary topic of litigation, Heath Abshure, Arkansas Securities Commissioner and president of National Association of Securities Administrators Association, gave a speech to his group and representatives of the SEC. His point is investor recourse is likely to be limited given the small amounts invested in crowdfunded offerings as it would not be cost beneficial for individual investors to commence law suits. So he advocates no restrictions on class actions. While the JOBS Act doesn’t restrict class actions, his point is broker-dealers that are associated with the offerings often have mandatory arbitration clauses with their customers. Implicit in his analysis seems to be those suffering losses from crowdfunding may find their entrepreneur and investment judgment proof and broker-dealers will be the only deep pockets available to make investors whole. But opening the class action door against broker-dealers may lead to a raft of shake down litigation episodes of the type common with announced M&A transactions that could ruin the industry.