There are two sides to every story. The same can be said for those who support and those who are against Crowdfunding. The proponents tend to be entrepreneurs, innovators, and America’s jobs engine. They are the ones advocating in favor of allowing entrepreneurs to raise a limited amount of capital from their friends, family & community. They are a fragmented group by nature, heads in the sand, focused on their businesses without deep pockets or the backing of special interests. The major opponents to crowdfunding are the SEC, FINRA and NASAA. They are government bureaucratic agencies with a vested interest in the current system, widespread oversight and deep pockets. Their job is to protect and regulate the large, often complex, public markets. However they tend to do so at the expense of small businesses. Overly bureaucratic rules, we see time and again, have a trickle-down effect on small businesses that hamper growth.
The following chart summarizes the arguments for and against Crowdfund Investing.
|Lobbyists Against CFI||
Advocates for CFI
|1) CFI will undermine important investor protections and prevent State Securities Regulators from enforcing meaningful parts of state investor protection laws.||1) CFI provides the same enforcement at the community level with hundreds of people, that the highly bureaucratic and costly process of only a few eyes does at the state level. Both State Regulators and users of CFI will actively be regulating the CFI industry: making sure the entrepreneur is real and making sure the investment opportunity is sound. Unless hundreds of people agree together no business will be able to raise their funding round. In addition, CFI users will provide something that State regulators can’t: the ability to decide pre-funding if an idea is worthy through an open dialog between and among the investors and the entrepreneur. Regulators can determine if enough information is disclosed but they cannot control the conversation that will either foster or deter investments. This conversation among the participants is the key element of investor protection that will be handled better by the participants, who have a vested interest in finding the truth, rather than the State Security Regulators.|
|2) Provisions of the Crowdfunding Bills would preempt the states’ authority to review offerings of “crowdfunded” securities||2) Current State-based regulations do not fit into the way business is done in the internet age. The SEC will have strong regulatory power over all Crowdfund Investing Websites and only SEC-regulated sites will be able to conduct CFI. This will limit who can crowdfund and provide a filter of crowdfunded securities. If startups and small businesses are forced to file with all states, they would spend all of their time and the majority of the funds they raised in filing fees and regulatory process. Streamlining the process with SEC oversight, while preserving the enforcement powers of states to pursue bad actors is what CFI proposes. This will lead to more organization and structure for those companies that go on to larger, more traditional rounds of financing that require state review.|
|3) It is crucial that the states retain full authority to review securities offerings in this area, given the significant fraud in this segment of the market.||3) Before any entrepreneur can use any CFI platform they will have to submit to a fraud/background check. No other form of current capital raising makes this mandatory. Unless an entrepreneur’s fraud/background check comes out clean (we also advocate for having a minimum credit score), he won’t be able to raise capital on CFI platforms. The opponent’s argument misses the transparency and speed that the social Web provides in investor protection. If you are confused about transparency think of all the data we emit on the internet on a daily basis. Any false moves can and will be uncovered and disclosed. For easy examples think of what happened with Representative Weiner and actor Alec Baldwin – their actions were immediately discussed on the internet: this is the nature and power of Social Media. Our framework also proposes a “one-touch” filing mechanism so that states can receive a “unified dataset” on a regular basis. This is the same data that they would seek in their review, and much of the same data found on a SCOR filing form. State Regulators fighting to be the ones to control this process will only make the process longer, more bureaucratic, and end up costing more for the same effect.|
|4) Protections provided by state review are even more essential because companies offering exempt securities under the Crowdfunding Bills will not issue ongoing reports like true public reporting companies.||4) We agree, there is nothing more transparent than communication. The reporting and communication that takes place for public companies is required because of the complexity of their organizations and broad spectrum on their investors. Public companies need to file public reports so investors can see what they are doing. (Albeit we’d love to see a report of how many investors are reading a corporate’s 10k’s). Because CFI is based on community financing, the social interactivity between the entrepreneur and investors will provide the communication and transparency about what is happening with the company and money invested. All this information will take place on CFI platforms, which will be open to the community investors as well. Again, a degree of transparency much more acute than that of public companies. Because of the open nature of the SEC regulated CFI platforms that we are proposing, when one investor has a question, all investors will be able to see the question and the answer. Today, if an investor has a question about a public company chances are it will go unanswered or only addressed at an annual meeting. CFI will provide immediate and continual reporting.|
|5) Further, as crowdfunding centers on community investment, the oversight should be vested in the regulator with the most direct interest in protecting that community.||5) Agreed, regulators need to provide the oversight for complex organization for which there is no other advocate for the investor. In CFI platforms those most directly connected to the community are the entrepreneur and those investing in them. The difference is now the community has a ‘role’ to play in Crowdfund Investing. And that role is oversight. Today more than ever, people aren’t haphazardly throwing money away. They have seen too much fraud taken place in the “regulated” markets to make them overly optimistic and confident about what someone says they are going to do, nonetheless someone they aren’t directly related. The oversight is going to be better regulated by individuals that know the entrepreneur and expect him or her to live up to what they say than a 3rd party regulator who is not related to the entrepreneur at all. Community banks tend to have lower default rates because of the relationship between the banker and the lendee. The same will be said for crowdfunding.|
|6) Strongly oppose provisions of the Crowdfunding Bills that would expand the registration exemption under Rule 506 of Regulation D by requiring the U.S. Securities and Exchange Commission to remove the long-standing prohibition against the general solicitation of these offerings||6) Prohibiting general solicitation had a time and place prior to the advent of the Internet and advances in Technology. Before these advances it was easier for one-to-one fraud (the majority of fraud) to take place. By restricting the communication channel down to two people it is easier to take advantage of unsuspecting individuals. By opening up the field of communication to regulated CFI platforms where general solicitation can only take place we still maintain how people are solicited and restrict it to these platforms. Controlling who and how general solicitation takes place this way will provide the investor protection that the ban on general solicitation was put in place to protect.|