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Crowdfunding is White-hot on Capitol Hill - Will it Survive the Fire?
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Crowdfunding is White-hot on Capitol Hill - Will it Survive the Fire?

Editor's Note: Crowdfunding is really heating up in Washington, D.C. with new developments every day and plenty of mainstream media attention. But few people are as close to the issue as's contributors. The following comes to us from contributing expert William Carleton, who has been following the different bills to legalize crowdfunding in the U.S. Congress for us for months now. This post was originally published on his blog. Carleton is a Seattle attorney with experience as a startup lawyer and angel investor.

Author's Note: Since this post was first drafted a few days ago, it's become clear that Senator Reid will try to get the Senate to adopt a version of HR 3606, the Jumpstart Our Business Startups Act. However, the leadership-sponsored Senate version, Senate Amendment 1833, which was introduced in the Senate on March 15, is very different from the bill which passed the House. I am running a comparison and will look to publish it soon. [UPDATE: Here is that comparison.]

Meantime, it looks to me as if, in lieu of the McHenry language in HR 3606, SA 1833 contains the language of the Merkley/Brown bill.

A crowdfunding exemption, to be given a fair shot, really needs to be permitted to leverage new ways information is disseminated, to test whether average investors can be protected in a new, and perhaps better, way than the current paradigm. If the Senate is going to bypass having markups and hearings on the Merkley/Brown bill, it would be better to stick with the McHenry language from the originating House bill.

Message to the US Senate: Don't listen to NASAA. Make crowdfunding as easy for normal people as Reg D is for accredited investors.

I know, the objection is, "but, but, but, accredited angel investors can fend for themselves; these little people are vulnerable."

Right, so do two things: (1) key in on individual investment limits - set them at a level where you think it's not that big a loss for people who may invest unwisely, or even gamble; and (2) require the use of the intermediary crowdfunding portals, and permit them to either opt in to regulation or regulate themselves.

That's it.

Startups raising under Reg D have lots of advantages:

    • no pre-filing or waiting period requirements;
    • no financial statement obligations;
    • no unique or expanded securities liability for material omissions;
    • no obligation to verify investor reps re: eligibility.

If startups and angels had to comply with a Merkley/Brown version of a Reg D offering, legal costs would quadruple, securities lawsuits would show up in an ecosystem where today they are virtually non-existent, and two-thirds of deals simply would not get done; America would lose millions of jobs.

Give equity crowdfunding a fair chance, on its own terms!

In fact, consider the following additional protections or safe harbors for crowdfunding companies and platforms:

    • Strip out all the income and net worth levels and need for regulatory definitions and standards for determining who is eligible (and liability for innocently getting it wrong): tell the investor, look, the startup and the platform are relying on you to be truthful about whether you are elgible; if you don't tell the truth about this, you are barred from bringing any claims at all against the startup or the platform.
    • Trust the wisdom of the crowds: allow transparency across the web for whatever platforms, startups or investors want to say. Just try it. It might not work. But try it. Revisit the experiment in 3 years.
    • Give startups and platforms the following affirmative defense (this is an iteration of Joe Wallin's idea): if you spend the proceeds on paying employees or contractors (if you create jobs with the funds!), then, absent willful fraud or theft, you cannot be prosecuted or held liable by investors.

If it doesn't work, that's fine. Assuming you all come to terms with getting money out of politics, the US Congress will work better and you can revisit the exemption down the road.

-- William Carleton is with the firm of McNaul, Ebel, Nawrot & Helgren. He also has experience as a startup lawyer and angel investor. Follow him on Twitter @wac6. Thanks to Freeman White, CEO and Co-Founder of, for reading and commenting on a draft of this post.

 Check out all the other recent coverage of the JOBS Act, the CROWDFUND Act and more from our team:

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  • Louis C. Magill Louis C. Magill Mar 21, 2012 08:22 pm GMT

    You raise some very salient points. Of some interest and by loose comparison, you might go back to 2000, then go forward from there with the evolution of Reg. S to deal with its abuses. Regardless of what is eventually approved, crowdfunding will go through an evolutionary process that will exhibit growing pains along the way. The key is vigilance which is why I recommend that the crowdfunding industry should have its own quasi SRO. I have serious reservations as to whether or not FINRA will be up to the discovery task, but is certainly best suited to cover the enforcement capacity. There is the CIA (as in the federal agency, not the Culinary Institute of America). We could have the CIAB or Crowdfunding Integrity Assurance Board. Or not.

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