An acquaintance recently asked why Kickstarter doesn’t have to comply with the restrictions set forth in the JOBS Act. Kickstarter is a platform that charges a commission for matching donors with young businesses and creative types who otherwise encounter difficulty funding their screen plays, independent films, unusual time pieces, and more. The JOBS Act, with the help of the SEC, governs platforms that do the same thing as Kickstarter. The only substantive difference is one between donations and investments. Donations are basically a gesture of good will with no possibility of financial returns while investments carry the expectation of profit.
So why doesn’t Kickstarter have to comply with investment limits, criminal background checks, consumer education, and other restrictions imposed by the JOBS Act?
The short answer is that the drafters of the JOBS Act want it to reflect public policy. Our politicians believe (rightly or wrongly) that fraud is more prevalent when people are acting in their own financial self-interest. Avarice, profit-motive, investment prudence . . . by whatever name it might be called, our public policy reflects enduring and overriding concerns that financial criminals prey on the financially self-interested.
A cash gift is fire-and-forget, no recourse, and lightly regulated (if at all). Try to buy a piece of a business because it appears to a be an attractive investment, on the other hand, and you and your intended recipient must pass a variety of hurdles to ensure it’s a legitimate deal, you have been provided adequate disclosures, you can afford to take the risk, and so on.
Whether there is a meaningful difference between con men who prey on the financially motivated vs. con men who take advantage of the charitable or philanthropic-minded is a discussion for another day. The mission of the SEC is strictly focused on boiler room operations and Ponzi-schemers, not corrupt pastors, bogus documentary movie-makers, or other fake do-gooders busily fleecing the unwary.
Are Kickstarter and the like enjoying favorable treatment by our regulators? Are crowd-funding investments justifiably being held to a higher standard? Will public policy concerns drive potentially complex and costly new SEC regulations?
Stay tuned for word from the SEC.