Buzz

The JOBS Act: A Better Way To Regulate Equity Crowdfunding

William Carleton, Contributing Editor, VCExperts


On December 26th the NYTimes ran an update on where the SEC is in the process of writing rules to implement the equity crowdfunding provisions of the JOBS Act.

The title of the piece, 'Crowdfunding' Rules Are Unlikely to Meet Deadline, is a downer, but the report is actually optimistic, insofar as it suggests that viable rules are achievable:

"Advocates for both investors and members of the crowdfunding industry have dissected nearly every element of the legislation. 'I think there are probably 25 or 30 legitimately important issues,' said Douglas S. Ellenoff, a New York securities lawyer who is advising some in the industry. 'But I think they've all been hashed out. They have heard issues from a variety of angles, and I think that the draft proposals are fairly advanced.'"

I remain highly skeptical.

The problem isn't a lack of earnestness on the part of almost everyone involved.

The problem instead is that the underlying legislation is an amalgamation of new behaviors and old regulatory theories. To write rules to implement such a clash of worlds, everyone is in effect seeking a "light" version of a limited offering registration. Online portals morph into a kind of broker dealer; issuers with no operating history are caught in the trap of preparing audited financial statements to no purpose; and promoters are held personally liable for disclosures in plans that, experience suggests, are likely to be abandoned within weeks.

I think the Congress should start over.

One way to go would be to make each individual citizen her own regulator, responsible for her own behavior.

I call this approach the "Individual Crowdfunding Account." This way does not require issuers, portals, regulators or anyone else to verify income or net worth.

Here's the core concept: each year, any individual is permitted to set aside up to $2,000 in an Individual Crowdfunding Account. Putting money into an ICA is completely voluntary. Some years, you could skip earmarking any funds to it; other years, you could partially fund it. But $2,000 per year is your max. After 5 years, you could have diverted no more than $10,000 of your income or net worth into an ICA. That is the essential means of investor protection in this approach – simple paternalism, a cap on how much you can devote to unregulated equity crowdfunding.

From funds in your ICA, you are free to invest in any crowdfunding deal you like. There would be no regulations for issuers or portals to follow, other than this one: no funds could be accepted from any source other than a bona fide Individual Crowdfunding Account. In fact, why not make this one prescription on issuers and portals really tough: all persons involved are personally liable to the investor for any funds taken other than from an ICA.

Could an investor withdraw liquid funds from her ICA at any time? Yes, of course. But then those funds are not available for investing in crowdfunding deals.

If the investor gets a positive return from one of her deals – unlikely, but possible – then that upside, being proceeds of her ICA funds, can be put back into the ICA for future investing. Or not. Totally up to the investor.

Congress is good at writing laws that expire if not expressly renewed. That trait can be put to good use, by experimenting with something that tosses out the old paradigm altogether. If Individual Crowdfunding Accounts don't work, the idea can turn into a pumpkin in five years and not be extended.


William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at http://wac6.com.