By Jonathan Wilson, CrowdFunding Beat Guest Contributor, Corporate Counsel at Taylor English Duma LLP,
Berkeley Law Professor, Stephen Solomon, writing in the New York Times, suggests that the SEC’s “dawdling” with crowdfunding rules may be having the effect of “saving crowdfunding.”
There is a little truth to that. Issuing crowdfunding rules by the end of 2012, as was required by the JOBS Act, would have squelched efforts by the states to adopt their own crowdfunding rules. Instead, with the SEC deciding that it is not obliged to follow laws passed by the Congress and signed by the President, there has been more than enough political oxygen for the states to experiment with crowdfunding in the limited sphere permitted under the 1933 Act and SEC Rule 147 for intrastate offerings.
As I’ve written before, intrastate crowdfunding has created opportunities for small, locally-focused financings, largely involving real estate. Real estate projects satisfy the 80% of assets test under Rule 147 and generally have the kind of local interest needed so that 100% of the investors involved will be resident in the state.
But if the SEC’s refusal to follow the law by issuing regulations has saved crowdfunding, it’s more a matter of “bombing the village in order to save it.”
The SEC’s worries about fraud in crowdfunding appear to be a knee-jerk reaction to change, more justified in theory than in practice. The SEC’s solution to the fraud problem, proposing that most crowdfund issuers obtain and disclose audited financial statements would do little to eliminate fraud and would make most crowdfund offerings prohibitively expensive.
(If you are truly a fraudster, and wanted to bilk investors through crowdfunding, you could create a new entity, obtain audited financials (your de novo startup would have no historical financial results to audit) and still make off with the proceeds of your crowdfund offering.
If the SEC really wants to save crowdfunding it would be better served by listening to practitioners involved in raising capital for small business and to adopt rules that are more carefully calculated to work in the real world.
Jonathan B. Wilson is a corporate partner at Taylor English Duma and represents small and growing businesses in securities and financial matters. He blogs often atwww.emerginglawblog.com (Cross posted)
Jonathan Wilson Corporate Counsel at Taylor English Duma LLP,