I recently blogged about the criticisms many in the legal community (myself included) have with crowdfunding as it is supposed to work under the JOBS Act (absent any forthcoming SEC regulations that might soften some of the onerous requirements of the Act). Last week, William Carleton wrote about an interesting proposal to fix crowdfunding, while maintaining the level of investor protection that those who included the multitude of restrictions and requirements in the JOBS Act and/or who now currently oppose it and want the SEC to up the regulation of crowdfunding want.
Mr. Carleton suggests doing away with the formalistic disclosure requirements, potentially broad liability, and onerous regulations of the JOBS Act and instead protect small investors who want to participate in crowdfunding by having them set up “Individual Crowdfunding Accounts”. Individuals will be allowed to contribute up to a certain annual amount — whatever amount legislators and regulators feel an individual can stand to completely lose in a year — into an account. Any return from an investment in a crowdfunded company (e.g., dividends or proceeds from a sale during a liquidity event) can go back into the account, no matter how large the amount. The individual may withdraw any or all of the money in the account for any reason, including any reason unrelated to investing in crowdfunded companies (such as to invest in the regular equity markets, put a down payment on a house, send kids to college, or even start one’s own business), or no reason at all. However, if they intend to invest in a company seeking investment under the equity crowdfunding exception, the money can only come from the Individual Crowdfunding Account.
The individual may invest any or all of the money in the account in as many equity crowdfunded ventures as he or she wishes. But if the venture fails and the investment is lost, that is it; absent fraud, the investor will not have any cause of action against the company, its employees or directors, or the crowdfunding platform the purchase was made on.
The goal of this proposal is to, at least in some respects, treat crowdfunders like angel investors, who invest in startups with the knowledge that those startups may fail and their entire investment may be wiped out. Furthermore, you avoid making failure — something many startups will experience — illegal, which many of us in the legal community fear will become a reality for equity crowdfunded companies under the JOBS Act and its related regulations.