We’re from the Government & We’re Here to Help: Crowdfunding Investor Safeguards.

This thing could be over before it begins. Recent commentary on crowdfunding in the New York Times is consistent with our view of the sausage-making process that is hailed as legislative progress today. The 11th hour Senate amendment intended to beef up so-called fraud protection risks crippling the crowdfunding portion of the JOBS Act: ” . . . Congress made the provisions hard to use. Crowdfunding companies will have to raise money through Internet platforms in small individual amounts, less than $2,000 for most Americans. If a company raises more than $500,000 it will have to prepare audited financials. This is a huge expense that will discourage most companies from resorting to crowdfunding for significant amounts of capital.” CrowdFunds agrees.

We  previously expressed our dismay at some of the sloppy thinking behind the mish-mash of provisions clumped together under the banner of “fraud protection” and have not changed our view.  Essentially, our elected officials do not delineate between:

  1. steps designed to protect you from bad guys engaged in financial crime and/or remedy investment fraud that has already occurred; and
  2. the distinct possibility that you will lose the entire value of your investment by betting on businesses that are young, under-capitalized, speculative, unproven, and sometimes plain wacky.

Effort to promote #1 is good if it lowers the cost of identity verification, aids the speedier administration of SEC investigation and enforcement, establishes a restitution fund for victims of financial crime, and otherwise makes life difficult for con artists.  But effort to protect you from yourself under #2 is a fool’s errand, ripe for abuse by investors and extremely difficult to enforce.

Consider the laughs and industry responses that would follow preposterous legislative attempts to protect you from your sometimes dumb investments:

  1. Pretend you were only permitted to invest 10% of your annual income up to $10,000 in the purchase of a house, which until very recently enjoyed the perception of a sound investment.  The real estate lobby would be marching on Washington if this ever happened.
  2. Imagine you were admitted entrance to a casino as long as you promised not to gamble more than $2,000 in a year.  Gaming interests would be grinding their teeth as they fired lobbyists and worked to replace congress en masse.
  3. Suppose you have to register with your state of residence and were capped on the purchase lottery tickets based on your income.  This could starve your state of a necessary income stream and . . . Hold on. That is just too crazy to contemplate.

Now we return to reality and the SEC rule-making process, with the distinct possibility things could in fact worsen for crowdfunding.  We shall see.

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