Here is where we stand, relative to crowdfunding, as of Thursday AM, March 22nd. The JOBS Act (H.R. 3606) is likely to pass today (or soon hereafter) with some amendment in place to help assuage the political nerves of the Senators who (rightfully in my opinion) see the enormous 'wild west' of pump/dump, boiler-room tactics and just good ol' fashioned huckstery about to be unleashed upon the populace en masse.
Though I applaud the effort for the amendments (sorta), they really do little. There are three major ones (S.1791, S.1970 and now S.2190) all with similar reins on solicitation, etc., though with varying degrees of pull. The key elements of whatever 'protections' are amended into the Act will, for the most part, fall into four categories: Investment Caps, Risk Attestations, Audited Financials and Registered Platforms.
Caps on an Individual's Crowdfund Investment Amounts
Regardless of how this is stated, it will be almost impossible to enforce. If an investor wants to invest, they will simply claim their income or net worth to be above the required threshold. With the current accredited investor threshold, it is a in/out, up/down decision: either the person swears to a very high threshold, or they can not invest (generally speaking). Under the crowdfunding 'protections', it's down to quibble match over just what is 10% of their claimed net worth, or if their income the previous 12 months (who will audit the truth on this one?) is under of over $100K, for example. Creating more bureaucratic hurdles, these provisions do little in reality, out on the street where I've worked investments for 20+ years. Spend time in the boiler rooms, listening to the schemes, trying to counsel against those exhaustively exaggerated claims, and you get a sense for how truly ineffective such a provision will be. Once a potential investor is spotted, any huckster worth his huckst will make sure they 'meet' whatever threshold is required.
Cat Bells: Attestations of Risk Knowledge
A similar whiff of legislative passivity rises from the provisions requiring the investor to 'attest' to understanding the high degree of risk involved with start-up companies. I call those things cat bells. Don't worry, I'll explain later. But first, I'm not saying it isn't a good thing to have these statements in an offering memorandum (as they are in SEC regulated offerings), but requiring the investor to affirmatively check a box saying that he/she understands, well the Bard would be proud as it is but a bit of theater. In the tens of thousands of investments I have seen, if an investor wants to make an investment (especially if freshly lathered by a skillful smile-n-dialer), they will simply and quickly check the boxes. (Hell, a huckster will check them for them.) Besides, these affirmative quizzes and checks are 95% for the protection of the company soliciting the investment. Thus they can say, "see here, he checked the box, so he can't be mad that he lost his money!" Again, I am not saying that such notices aren't good. They should be in RED ALL CAPS 36PT HELVETICA. But they are still cats bells.
Sorry Fluffy came in your house and ate Breezy, your beloved parakeet. What? Hey, you can't blame me-- I had a bell on Fluffy's collar! Yes, a bell, to protect birds from her! It's not Fluffy's fault that when she stalked Breezy (skillfully moving ever so slowly such that her bell doesn't ring) that Breezy didn't fly away. Oh, Breezy's wings are clipped? Well, who would do such a cruel thing to a bird! You should be ashamed.
See how it's done?
Finally, on this point, I can quickly come up with 14 loopholes, from pooled investments, surrogate investors, non-tax accounting to reverse co-ops. It is a feel-good provision, a touch of theater, a no-crossing sign on the Rio Grande. Alas, a cat's bell.
Ok, talk about theater. This will only take a second. These are primarily start-ups we're talking about, right? Films yet to be produced, right? Inventions yet to be fully prototyped, correct? Exactly what will the auditor audit? I was an auditor with Ernst & Young, back in the day. A great gig. You learn alot. Boring as hell. But I digress. If the audited financials provision is included, and say I am seeking $1.5M, I will need to provide audited financials. Ok, sure. Dandy. Come on auditor, come audit the $657 we spent to form the company, the $186 we spent on a software upgrade we didn't really need, and the $430 we spent on beer at the launch party in Greg's apartment. WTF? Ok, you argue back, the audit is for the ensuing years, auditing the progress of the company. Ok, fine. But again, by then the investment is made. A tad late if the objective is to enlighten and protect the 'potential' investor so that he/she can make a sound decision. Ya follow?
My primary personal interest is film finance...holy cow, yippee, hot damn perfect for equity crowdfunding. But a required audit up front? I sure hope the audit firm doesn't charge much, or right there is where the huckstering will be going down.
Registered Crowdfunding Platforms (portals)
This one I like. This can make a difference. I read yesterday one one of your blogs that there are no less than 400 crowdfunding platforms online. I dunno about that. Maybe so. We list the majors at our site: www.CrowdFundSecurities.com. No doubt there are many, and mucho-many-more are about to pop open. So, some sense of legitimacy would be great. Some ordination of propriety if you please. Especially if the platforms will be handling any of the money directly. I agree with Senator Merkley on this point: "If there is no information, there is nothing to guide the wisdom of the crowd."
But, what is more important is that our infant industry quickly regulates itself. (That sounded wrong...though I don't think self-regulation is going to save the 'infant' industry.) Back to the point: I like the CAPS program underway at www.Crowdsourcing.org. (CAPS = Crowdfunding Accreditation for Platform Standards). Fodder for another blog, but hats off to them.
And finally a self-serving plug. What the industry will quickly develop are representatives/agents, brokers if you will, who will guide companies to the right crowdfunding platforms, help them get their compliance docs in order, watch out for the hucksters, watch the money flow and help them maintain and retain their relationship with their new crowdfunding investors/equity owners. Companies like ours, CrowdFund Securities, www.CrowdFundSecurities.com can make a huge difference in discerning the sheep from the goats, if you will. And we will serve the investors too, also guiding them to the most reliable platforms, the right deals. We have been online for three days now, and are overwhelmed with inquires. And surprisingly from as many potential investors as potential fund receivers. Let the funding begin.
So, in conclusion... I'm tired. This has been a whirlwind week for all of us. Let's see what our esteemed Senators do today, and I'll get back to you with my thoughts.
Reporting from Crowd9,