Editor's Note: The following post is the third installment in a series from David Drake, a founding board member of Crowdfund Intermediary Regulatory Advocates or CfIRA, designed to address some of the common issues, questions and concerns around the JOBS Act, which legalizes crowdfunding for equity in the United States beginning next year, after the SEC completes its rulemaking process. In this post Drake offers some recommendations on how to handle consumer protection and documentation under the emerging crowdfunding framework. (More in Drake's first and second posts in the series)

Consumer Protection

Investor protection is a key part of any legislation that seeks to open up opportunities to the general public. Along these lines, we’ve previously covered requirements and suggestions for education, fraud protection, transparency and a whistleblower program. Section 302 also establishes investment limits to guard investors against catastrophic harm, and we offer our thoughts on this issue here.

The intent of the JOBS Act is to match invested amounts with net worth, so that investments are on par with the ability to suffer losses in the often risky new ventures and small company arena. In principle, this is an important and worthwhile concern. However, we feel a distinction needs to be made between individual and institutional investors and not simply a general rule for the marketplace as a whole. This can be accomplished by removing institutions from the definition of “person” for purposes of regulation.

Documentation

An associated difficulty comes with data gathering and checking to ensure an individual is not exceeding the proposed limits. The method used currently in other investments requires the completion of a questionnaire and the awarding of the status of “accredited investor.” This may be the only workable solution, as other due diligence requirements could cripple the marketplace with unworkable and expensive credit or background checks. Even checking for exposure among different crowdfunding offers (across intermediaries) has practical difficulties, unless a registry is created to gather such data.

Clarification is also needed on limits in aggregate versus per-issuer limits.

- There's more to come from Drake on the JOBS Act in the next few days. In addition to his role on the board of CfIRA, Drake is also co-founder and executive committee board member of The Crowdfunding Professional Association (CfPA) and co-founder of The SoHo Loft series of events on capital creation and crowdfunding. He is a partner at LDJ Capital.