On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startup Act, or “JOBS Act,” which exempted certain “crowdfunding” activities from the registration requirements of the Securities Act. The Securities and Exchange Commission (SEC) was supposed to promulgate rules by Jan. 5, which—subject to statutory boundaries—would implement the crowdfunding exemption. It failed to do so. Six months later, the SEC has not even issued initial proposed regulations. In the meantime, public comments to the SEC on the need and specifics of crowdfunding continue to roll in, and the small business community stamps its foot impatiently.
Mary Jo White, who was confirmed as the SEC Commissioner on April 8, has repeatedly stated that completing JOBS Act rulemaking is amongst her top priorities. The delay in rules implementation, however, suggests that balancing the various priorities in the crowdfunding regulation is proving a tough nut to crack. The stated purpose of the JOBS Act was “to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.” The term “crowdfund,” however, is not used in the act to refer to access to capital, but instead is used as an acronym for fraud avoidance—“Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure.” The act thus neatly identifies the conflict the SEC’s regulations must resolve: How can we tap into the power of millions of Internet denizens and their social media and online connections to drive business investment while simultaneously ensuring those same investors are not defrauded in the process? The Internet is both the solution and the problem; it provides access to the Internet mob for investment, but does so immediately and without personal interaction, supplying the means for anonymous third parties to bilk potential investors of hard-earned money under the guise of a failed business venture.
The lessons learned from these existing portals regarding fraud avoidance will likely shape the SEC’s regulations. Kickstarter is a good example. Per its FAQs, Kickstarter does not screen the projects on its site aside from ensuring they meet a short set of project guidelines, it does not have an equity stake in the projects, and – once a project is funded – Kickstarter disclaims any responsibility for ensuring that it is completed . It steadfastly refuses to refund funds to project backers. Thus, for fraud prevention, it places the onus entirely on the project creator and the Internet community, asserting that its sign-up process creates a legal responsibility to follow through on the project once funded, and that the reputational impact of a failed Kickstarter project acts as a deterrent to fraud.
The combined effect of legal responsibility and reputational impact appears to be substantially successful. Since 2009, Kickstarter has launched nearly 105,000 projects, raising nearly $700 million in the process. Of that amount, about 10 percent ($75 million) of the dollars raised were for projects that were funded but that, for whatever reason, were not successfully completed. Although Kickstarter does not archive projects that fail to be funded, it does keep projects that were unsuccessful available for searching. Thus, if a creator fails to complete a project, its failure is available via a simple search on the site or a search engine.