Congress Risks Snatching Crowdfunding Defeat from the Jaws of Victory

As crowdfunding supporters hold their collective breath for Congress to send a bill to the President for his signature, some are reminded of the cautious advice about second marriages representing the triumph of hope over experience.

What could go wrong? For starters, the proposed crowdfunding legislation is gestating in fear and distrust. Bernie Madoff’s massive fraud is still fresh in our minds. The reputation of Wall Street is slightly ahead of North Korea (maybe). Media reports of corporate accounting scandals and other shenanigans at shareholder expense are legion. There are no limits to the lengths our politicians will go in order to protect the public from itself–or at least appear to be protecting the little guy from market meltdowns.

The problem is that crowdfunding isn’t about fear and distrust. Startups are full of promise, a refreshing departure from the general skepticism of financial markets. Crowdfunding thrives on fundamental optimism: that a startup will one day make it big, new jobs will be created, a ground-floor investment will defy sometimes long odds, and so on. It’s the frothy Springtime to the dull Winter of big business.

Treating grownups as if they need an extra layer of protection in a crowdfunding environment is a product of fear and distrust, and one that appears to be wildly misplaced if the instances of crowdfunding fraud in the UK and elsewhere are any indication.

A second problem is that the proposed crowdfunding bills suffer from unnecessary complexity, a failure of the “simplicity test” described by Davis Wright Tremaine LLP attorney Joe Wallin. Others have commented on the messy process and potential for ineffective legislation, so we’ll have to wait and see whether the our politicians view the Internet as terra incognita that must be tamed, or another avenue for streamlined risk capital.

As Patrick Ruffini writes, “Crowdfunding shouldn’t be — and actually isn’t — controversial, yet some politicians are trying to stand in the way. For too many in Washington, the Internet is still a foreign land — one to be regulated and held at bay. Instead of the enormous potential for new small business growth, some politicians are demagoging the potential for fraud . . . ” Will fear and distrust prevail? Stay tuned.

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