The JOBS Act: Crowdfunding and Local Investing

William Carleton, Contributing Editor, VCExperts

For those, like me, who approach the crowdfunding exemption under the JOBS Act from the background where startup investing is the exclusive province of angels and venture capitalists, it can be difficult to sort out, not only the prospective utility of equity crowdfunding, but the audience for it.

Seeking correctives, I borrowed two books I have learned about during the course of following the original McHenry crowdfunding bill, through its successive iterations, winding up with the cynical bait and switch of the Merkley/Brown bill. These books are: Amy Cortese's "Locavesting: The Revolution in Local Investing, and How to Profit From It," and Michael Shuman's, "Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity."

(Fun aside: I got to meet Amy and Michael in person at a celebratory gathering of crowdfunding advocates after President Obama signed the JOBS Act in early April. Here is a picture from that event, of Amy Cortese, Jenny Kassen and Kevin Lawton acknowledging Michael Schuman (behind the camera).)

Amy and Michael are both thought leaders for the cause of democratizing investing. That is to say, although they were not (to my knowledge) among the forefront of the activists parsing legislative language with the staffs of Rep. McHenry, Sens. Brown and Merkley, and the White House; and although they are not (to my knowledge) among the nascent crowdfunding industry organizers setting up an SRO and meeting with SEC staff about rulemaking to implement the JOBS Act equity crowdfunding exemption; both have written, spoken and organized on the topic of how the securities laws end up serving the interests of the 1% and large, corporate issuers, at the expense of entrepreurs and the health and vitality of local economies.

I would surmise that Amy and Michael each maintain a keen interest in the current legislation and the upcoming rulemaking, although they also retain a perspective that won't assume the cause will stop with this initial federal experiment.

Because the cause is more broadly concerned with how money cycles through local economies - and about measuring the value of goods and services that re-capture or account for some of the externalities that don't get measured when economic activity is looked at from the perspective of global trade - the federal equity crowdfunding exemption now in the works can't be the only policy redress for how local entrepreneurs access local capital. (The answer will require reform at state levels, too?)

Here's an excerpt from Shuman's book, in a chapter that suggests that securities laws and regulators might do more to truly protect investors, and less to serve the interests larger issuers have in keeping upstarts out of the game, were investor protection modeled after consumer protection, rather than a licensing paradigm:

"Down the rabbit hole of securities law is a jabberwocky of regulations that allows the rich to get richer, while the Red Queen screams 'off with their heads' to any unaccredited investors who dared to have tea with small businesses. Only a Mad Hatter could insist that the least powerful businesses in society dole out a small fortune to attorneys before they even can knock at the doors of potential investors, including accredited investors. . . .

"If we applied the logic of securities law to consumer goods, commerce as we know it would come to a grinding halt. . . ."

" . . . [F]ederal and state laws do impose lots of requirements on the producers, distributors, and sellers of goods in the United States, and much of our political wrangling is over what's a sensible level of regulation. . . . But notice the main difference from securities law. In the consumer context, freedom to engage in commerce is presumed. Small companies have permission to get started, to sell products and services to anyone, and to advertise anywhere. In securities law, the presumption is against selling shares to investors until permission is granted."

The equity crowdfunding exemption under the JOBS Act may be a first step, but it does not shift securities law to a consumer protection paradigm.

William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at