Crowdfunding and the limits of the SEC

By now, every securities regulator and most others are familiar with Bernie Madoff and the gaggle of modern-era con men such as Allen Stanford and Marc Dreier, all of whom were ultimately caught by joint action from various law enforcement entities, including the SEC. They unearthed fraud in the hundreds of millions and billions of dollars collectively.  These are only some of the most high-profile cases prosecuted by the SEC, and there is little doubt that the SEC basks in the media glow as any enforcement agency does when it receives favorable press.

The problem with attention-grabbing prosecutions dealing in massive scams and huge financial losses is that it leads the public to believe that only the SEC is preventing fraud. In truth, the SEC is prosecuting criminal behavior after it has occurred.  This is an important distinction because prevention happens before, and prosecution happens after, a crime occurs. While successful prosecutions arguably have some deterrent effect on future scam artists, deterrence is only a part of crime prevention.

So, if the SEC and other government agencies are unable to stop Madoff, Stanford, and Dreier before the victims are soaked, how will the SEC prevent fraud in crowdfunding?

It likely won’t. Our federal government has developed expertise and drawn on deep resources to enforce the laws against criminals after the crime has been committed. But its track record at preventing financial crimes before they occur is spotty when viewed in the most favorable light. In fact, one could argue that the monumental frauds perpetrated by Madoff, Stanford, and Dreier actually expose the strict limits of the power of the SEC–only achieving colossal verdicts that speak to the failures of preventing these individuals from defrauding others.
It is probably not an overstatement to say that the fate of crowdfunding hinges on the the degree to which the SEC appreciates the limits of its powers at preventing financial crimes. Entrepreneurs, investors, and the public are all eagerly awaiting the verdict.


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