The Symposium’s second panel discussed the JOB Act’s crowdfunding exception. Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks. [Note: Mr. Brooks is with the S.E.C., but noted that his remarks are not official and do not represent the administration’s position. His comments are his own.]
What is crowdfunding (“CF”) is trying to achieve?
Professor Dibadj began, noting that the CF movement is largely motivated by technology and the concept that individuals can pool money towards a common cause. The idea had worked in other sectors (e.g. natural disaster relief or political campaigns), so some wanted to apply CF in the private sector. The problem, pre-JOBS Act, was that capital transfers could be considered an unregistered investment or security, thus easily violating federal securities laws. Martin Zwilling agreed that investors saw CF structures work in the non-profit space, so they asked, “Why couldn’t it work for for-profit companies?”
Mary Dent added that the CF movement was spurred by the perception (whether or not it is true) that small companies have recently been the biggest contributor to job growth. However, many startups could not access funding from skeptical VCs or banks. Congress wanted to encourage these small, growing companies so created the JOBS Act’s CF exemption to allow alternative funding networks.
Martin Zwilling cautioned that investors might be funding weak or under-developed companies. VCs might argue that the market has not suffered from a lack of available funds, but a shortage of good investment opportunities. Zwilling concluded, “I don’t think CF will solve [those companies’] problems if they’re not ready for the market yet.”
Professor Bartlett viewed the rise of CF as “the democratization of finance.” Many CF platforms and groups press their case by framing it as a fairness issue, whereby small, less-sophisticated investors can participate in startup financing opportunities. However, Mr. Brooks drew upon his experience as a securities regulator, noting that this very democratization creates serious concerns of fraud.