Crowdfunding Wild West Transitions to Tamed Frontier

By Candace Klein

CINCINNATI—The Senate has approved (73-26) the JOBS Act (HR 3606) with amendments from Sens. Merkley, Bennet & Brown’s CROWDFUND Act (S. 2190). Under the JOBS Act, entrepreneurs will be able to raise up to $1 million per year through online crowdfunding platforms like my company, SoMoLend, and such others as Peerbackers and Crowdfunder. The bill includes added protection for non-accredited investors. The amount investors will be able to lend depends on their income, with some individuals capped at $2,000.

As I’m sure many of you reading this are aware, there was much debate on the House bill, primarily around issues of fraud and investor protection. Frankly, as the founder of a crowdfunding platform that could have benefited from the House bill, I should have been wholly and solely supportive of the House version. However, the securities attorney in me fears for the longevity and long-term health of this new burgeoning industry.

A zero regulation environment for a new fledgling concept is cause for concern
JOBS Act unamended

With no regulation, we would have seen hundreds of crowdfunding platforms pop up across the country over the next few months. Those platforms, with no guidance and no regulation, would not necessarily require transparency, would not offer disclosures about risk, and would likely be in violation of a number of other laws (e.g., Truth in Lending Act, Electronic Signature Act, Fair Credit Reporting Act, etc.).

This haphazard business growth would have provided plenty of ammunition for federal and state regulators to use the lack of guidance in the bill as an excuse to over-regulate the industry—a self-correction, if you will. We have seen this many times before in the legal field. Overregulation and an onslaught of lawsuits would have likely followed. This would have shut down many budding platforms, because they simply wouldn’t be able to afford to legally defend themselves. The result would have been a whiplash effect for the crowdfunding industry as a whole.

A more moderate approach: changing the world responsibly
JOBS Act including CROWDFUND Act amendments

As a business owner who is directly affected by this legislation, I want to be able to invite borrowers and peer lenders onto my site as quickly as possible. However, my interest is for the best interest of my customers—borrowers and lenders. I want to be a pioneer in an industry that will be hailed a century from now as the new era for small business access to capital. I want to be remembered by future generations as a CEO who truly cared for the small business borrower (and lender). As such, I appreciate the guidance that Senators Merkley, Brown, and Bennet offered in amending the JOBS Act. I appreciate the required disclosures for investors. I think it’s a smart decision to require 21 days between when a business posts a request and when someone can actually fund it. I think due diligence is a good thing.

I also believe that securities laws were put in place in 1933 and 1934 for very good reasons. While our current securities regulators do not have the tools in their toolbox to adequately make sense of this new crowdfunding industry, I don’t wish to undermine the protection for investors that our nation has spent decades building. I also want our country and its entrepreneurs to be on the forefront of innovative new ways to spark investment in new business and jobs creation. Crowdfunding can change the world, but let’s make sure we do so responsibly!