Crowdfunding Legal by 2020?

Crowdfunding Legal by 2020?

The US government passed the Jobs Act in the Spring of 2012.   Equity Based Crowdfunding was supposed to be legal by the Spring of 2013.  By rule, the SEC was required to issue the equity based crowd funding regulations by the beginning of 2013.     The SEC has been dragging its feet.  It is not really clear when crowdfunding for shares will be legalized.

A recent Forbes article outlined a ten point scenario that the earliest would be by January 2014.   That is if the SEC were actively working on getting crowdfunding regulations and policies done.  The SEC has other priorities.  The fact is that the SEC is busy with Dodd Frank regulations.  Crowdfunding is not a top priority.   Crowdfunding allows the people to do something.  Dodd Frank is about restricting and prohibiting activities.  Government loves to regulate, fine and tax.  Dodd Frank will drive public relations.  Dodd Frank will increase government revenues.  It is a promotion builder legislation.  Crowdfunding is none of that.  It is a side project that “some Americans” want.  The SEC is sending a message that “y’all can just wait til we get around to it.” 

If I were SEC chairman, equity based crowdfunding would be my top priority.  It would already be legal by now.  Because crowdfunding will boost the economy.  Because crowdfunding will create jobs.   And because I see crowdfunding as a private property and free speech right.  We should be allowed to do what we want with our money.  If we want to spend our money on buying glass chickens or video game points, then so be it.  But I can’t invest $100 in Joe’s Pizza Joint down the street.  Joe has this great pizza sauce that he wants to sell in all the supermarkets, but he needs yours and mine capital to get it to market. Current law makes it illegal to invest in Joe’s dream in return for shares.  

The free speech right is being played out on the donation based crowdfunding.  Veronica Mars project has raised over 3 million dollars from over 50 thousand fans in a few days.  This success is incredible.  The people have spoken.  They want to see the Veronica Mars show.  They are overturning Warner Brothers’ decision.  Isn’t that exciting?  I think it is great.  It is Democracy in action.  However, those participating in the production of the show are the only ones that will benefit financially.   All those that put up the money will get some chintzy reward and a chance to watch the film.   Why shouldn’t they be allowed to be compensated financially?  Because a 1934 Federal law says so?   

Securities law is meant to protect the people.    Does it really?  Did it protect the shareholders of Enron, Worldcom, and the bondholders of GM?   Were home owners protected from the overspeculation in the housing market?  No, of course not.  In fact, it was the Government’s own Community Reinvestment Act that led to the housing bubble.  After the housing market collapse, whom did the government rush into save?  That’s right, the banksters.  Not the homeowners.   

Government are notorious for offering phony investment scheme, the lottery.  You have a 1 in 175 million dollar chance in winning.   How many people plunked down hundreds of dollars if not thousands per year on government run lotteries.  The return on investment is horrible.  Yet, its for a good cause.  Our country would be much more prosperous if we could invest in businesses that we want to invest in.  

I don’t buy for one minute that the government is taking its time writing the rules and regulations on crowdfunding to protect the small investor.   It is not true.   Let’s look at some more facts.   Crowdfunding experts estimate that the crowdfunding market initially will be about $5 to $10 billion market annually.   That is infinitesimally tiny compared to the stock, bond and commodity markets, where trillions are traded each year.  Don’t get me started on the derivatives market.  The size is about 1.2 quadrillion.   That is with a Q.  

Let’s say the fraud were 10% of all crowdfunding investments.   It won’t be that high. For the sake of argument, we’ll use 10%. That’s $500 million dollars in a $5 billion dollar market.   As crowdfunding grows, assuming that it does, I will also assume that the percentage of fraud will go down.  If it goes up, I am assuming, then equity based crowdfunding total annual investment would go down due to the extreme risk.   As I surmise, crowdfunding will enjoy a natural boost from good PR.  Stories like Pebble Watch and Veronica Mars will dominate the headlines.  Those that invested will be grinning as they drive down PCH in their new Lexus’s.   Of course, the muchrakers will detail the fraud.  How some investors lost their Starbucks money.  (SEC limits the amount to of investment to $2000  for a person with a net worth of less than $100K. If Kickstarter is any indication of the investment amount, the average investment will be only a few hundred dollars.).  

Isn’t there rampant fraud on Wall Street?   All the regulations in the world can’t stop it.  The SEC is powerless in stopping it and in the case of Jon Corzine chose not to even prosecute one of the perpetrators.  

It might be easy to mitigate much of the fraud.   There could be a crowd funding index fund where the risk is spread out over tens of thousands of projects.   A small insurance tax could be added to the investment of successful ventures to reimburse those who lost money to fraud.  I’m sure there are better solutions out there.  

The foot dragging is simply irresponsible.  The government could have legalized crowdfunding by now if it had the will to do so.  Look at how the government rammed through healthcare and gun control legislation.  The delays are intentional.  The people want crowdfunding.  The government does not really want it.  So delay, delay, delay.  It may be due to bureaucrats working with Wall Street insiders to draft regulations that will allow them to control and dominate the crowdfunding space.  Or perhaps even worse.   Wall Street may want to squash crowdfunding altogether.  They don’t want the competition, no matter how small it may be.  It would be very easy to do.  

What start up can afford $50k to 100k in fees to comply with the crowdfunding regulations in order to raise $1 million dollars.  There is no guarantee that the company will raise this money.  This would be a big gamble.  The SEC is proposing that financial statements be audited.  This is costly.  

Donation based crowdfunding works because the barriers of entry are so low.  This minimizes the risk.  This is the great feature of crowdfunding.  You don’t need a battalion of lawyers and suit cases full of cash to raise money.  You don’t have to sell your company to angel investors.  

The SEC rule to limit total investment to $1 million is arbitrary and too low.  You will have companies that may go the donation route first to raise more money.  Some companies have been successful raising much more than $1 million on Kickstarter.  This arbitrary safeguard is actually a hindrance to the growth of the equity based crowdfunding industry. 

The facts remain that the American people should be free to do what we want with our private property.  The government mandates that we must contribute to its retirement fund and we now must purchase at a minimum its healthcare plan.  Yet, we are not allowed to invest in our neighbor’s latest business venture.   Crowdfunding is about much more than just making money.  It is about liberating the American people.  It is about standing up for our human rights.   We need to do all that we can to ensure that crowdfunding becomes legal as quickly as possible.

From David Drake

Obama’s 10 Steps with SEC & FINRA to Legalize US Equity Crowd Funding

Step 1.

The Announcement—at the earliest, a new SEC head will be announced in the last week of January, though the announcement could come as late as March.

Step 2.

Ratification—the Senate (which is controlled by Democrats), not the House (controlled by Republicans), will approve Obama’s choice.

Step 3. Say the new SEC Chair comes in Feb. 15 – he/she would need 30-45 days to review operations,

Step 4.

and another 30 days to set up the proposal to be voted on by the SEC Commissioners, then we would be around May 1st.

Step 5.

90 days of public commenting would take us to August 1.

Step 6.

It would take more days for the staff at the SEC to summarize all the proposals and circulate memos on suggestions to the Commissioners.

Step 7. After Labor Day the SEC Commissioners would set up a time to vote on the proposal as a final ruling. This puts us out to Oct. 1st.

Steps 8, 9, 10.

And then we are not finished. FINRA has been as quick as 30 days to implement SEC rulings but some have taken years…..

FINRA, the private police extension of SEC, will have to undergo its own process of proposals, commenting and rule making. That takes us into 2014 before we will see strong and swift progress.

The clock will start ticking when a new Chair of SEC starts work. 

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