Congress appears to be inching closer to passing crowd-funding legislation with the recent JOBS Act that includes a number of ideas for easing the restrictions on raising capital. What happens to the crowdfunding-specific portion of the bill in the hands of the Senate remains to be seen. Competing bills in the Senate are keenly focused on preventing crowdfunding fraud, and so include criminal background checks on business principals or the requirement that intermediaries be licensed as broker/dealers.
CrowdFunds understands that ever-expanding investor protections are all the rage these days, but legislators should take care to differentiate between (a) sensible anti-fraud safeguards and (b) telling individuals that they cannot be trusted to make sound investment decisions on their own (e.g. setting individual investment limits at $1,000 is equivalent to the government saying you’re a fool soon to be parted from his wallet, so the wallet should be tiny). The key to sensible anti-fraud safeguards is evaluating any new provision in view of this question: does the proposed safeguard meaningfully improve existing anti-fraud safeguards? If lawmakers cannot demonstrate a substantive improvement over the financial crime regs already on the books, current law enforcement/SEC capabilities, and established financial industry practices, then it is quite likely to amount to political grandstanding under the best circumstances. Even worse, excessive worries about ponzi schemes and hucksters merely spawn solutions-in-search-of-a-problem and burdensome, industry-choking regulation.
Conducting criminal background checks on the principals of a business seeking investor capital and requiring basic due diligence to validate that a business is what it claims to be are reasonable anti-fraud safeguards. Nothing new there. But forcing crowdfunding intermediaries to conform to the broker/dealer regs is unreasonably inconsistent with young businesses seeking (relatively) small sums of capital.
Here’s to hoping Congress gives crowdfunding a reasonable chance of success.