The JOBS ACT and Kickstarter

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.

 

 

 

 

 

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Crowdfunding: next up to bat, the SEC

Barring any 11th hour amendments or cold feet, President Obama is due to sign the JOBS Act this week. The new law caps a tumultuous legislative ride for all groups looking to invest or raise money in the micro-finance world, and a couple of the expected major benefits are neatly summarized by Ryan Caldbeck in his column for Seeking Alpha.

Assuming the JOBS Act proceeds, the SEC will have a 270 day period in which to establish rules for crowdfunding that are likely to beef up safeguards for the so-called unsophisticated investors based on the September 2011 testimony offered by SEC Director Cross.  Whether the forthcoming SEC rules make crowdfunding platforms viable or not remains to be seen, as Naval Ravikant pointed out in a recent interview.

How will the new rules take shape? As always, the devil will be in the details.

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Crowdfunds and the JOBS Act

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.

 

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