The JOBS Act and Crowdfunding

by Adam on October 27, 2013

Earlier this year, the SEC voted in favor of lifting the ban on general solicitation for private companies seeking investment, as part of the JOBS Act put into effect in April 2012. This initial step held great potential for entrepreneurs, primarily because it meant that they could now go out and actively advertise their investment opportunity to accredited investors (something that previously had to be kept out of the general media, and instead had to be handled by word of mouth and introductions). The effects of the change are still playing out, but I hope it’ll mean a wider pool of interested investors who are making such investments in startups. You can read more about the landmark decision, which took place this past summer, here:

http://techcrunch.com/2013/07/10/sec-general-solicitation-ban-lifted/

In a related vein, a vote that was left in limbo related to whether the SEC was going to allow unaccredited investors to take part in investment opportunities, through crowdfunding campaigns that would help startups raise money. Prior to any decision on this measure, it was against the law for crowdfunding entrepreneurs to use the popular platforms to raise money for the purpose of launching a business (though some skirted the line in that they used the funds to prototype a product that a business would sell). Now, in another landmark decision, the SEC has voted earlier this week to release the proposed ruling for public comment, a positive sign that could point to a favorable vote that allows for crowdfunding of startups to commence. You can read more about the proposed ruling here:

http://www.bloomberg.com/news/2013-10-23/sec-to-vote-on-crowdfunding-plan-as-white-advances-jobs-act-1-.html

There are both supporters and opponents to the rule, as there are with any issue. Supporters have said that the crowdfunding change could open up a wealth of investment opportunity on both sides of the table, allowing smaller startups to attract investment where they currently cannot from banks or venture capitalists, while private investors have the chance to take part in a growing market and potentially make some money, all while funding future businesses.

Opponents to the ruling are throwing around the “F word.” Fraud. Their fear is that, without an regulated way to verify business opportunities, vet investors, and protect individuals from nefarious actors, there is a high potential that many private investors will either make a bad bet on an investment, or else lose their money to scammers. This is especially a concern with individuals who are not truly equipped to make a decision about investment, or who are given false information off which to judge investment potential.

Even with the above argument, I’m still very much in favor of the change. I think if the demand is there to expand crowdfunding to these new types of opportunities, and there is, that demand will drive a marketplace that can put in place safety guards and other forms of regulation over time to protect investors. But, if those interactions are never created, the marketplace won’t exist, and I think it’ll become much harder to try to put in place de facto regulation before it even gets off the ground.

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