2,527 crowdsourcing and crowdfunding sites
Editor's Note: The following post is the fourth 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 address the issue of due diligence under the emerging crowdfunding framework. (Also see Drake's previous posts, which deal with education, fraud protection, transparency and creating a whistleblower program, advertising and investment advice, and consumer protection. )
Intermediaries, as set out in the Act, will be required to obtain background and history checks on officers, directors and certain affiliates of the issuer. Our concern is that these provisions do not constitute an undue burden across the marketplace. If background checks are set in parallel with the size of the offering, this would give a scaling feature that might be necessary to keep smaller offerings feasible. And smaller offerings are expected to be, overall, a significant part of the crowdfunding landscape. A 20% shareholder in one issue shouldn’t automatically be required to meet the same level of background checks as one in a much smaller offering.
We would also like to see a safe harbor provision that limits liability for intermediaries who perform to regulated standards. These standards would be the least burdensome with automated checks, such as credit and criminal history using existing technology solutions.
The balance to be struck is between a high level of fraud detection and investor protection, coupled with the lowest overhead, especially for smaller dollar amount fundraising. The parallel with broker-dealers is not a strong one. Funding portals should have a lower standard to meet because they have a role limited by statute. The goal is to find a commercially realistic solution and a safe harbor checklist that all portals can adopt.
- 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.