Although a deadline has been set — as we discussed in an article published earlier this week — SEC officials have a few more hurdles to jump over before reaching a confident decision; one of the unresolved issues at hand is the notion of crowdfunding investor protection — how to avoid fraudulent claims and over-valued investments. One of the JOBS Act’s most popular stipulations grants small-time investors (many first-time) the right to purchase equity from campaigning businesses. Since these are not accredited investors, myriad concerns fall on the table. Currently, there are two popular solutions for the SEC to maul over: “self-attestation” or an ubiquitous crowdfunding database.
Self-attestation relies on the honest word of the investor; he/she reports their own net-worth, thus setting their own limitations. By not requiring documentation from the investor, the SEC would have to waive all of their responsibilities since investors would have a way to lift the limitations of the JOBS Act without legal repercussion. Of course, the largest concern would be that without crowdfunding investor protection overhead, many amateurs would gamble their savings. The safer option — one that requires vast resources, time, and supervision — would be to implement a third-party database to track investor activity, verify the accuracy of an investor’s net-worth, and regulate all U.S. based crowdfunding portals. Sadly, this has the potential to stall equity-based crowdfunding, and many investors are growing impatient.
In Canada, the OSC just wrapped up a similar round of crowdfunding investor protection planning. The proposed (not yet instated) solutions include:
- An universal investment cap of $2,500 per instalment or $10,000 annually
- Issuer must provide investor with all financial documentation, including a risk projection outline
- Investor has the statutory right to sue the issuer for misrepresentation
- Both parties are to sign a full disclosure encompassing all investment variables
- 48-hour “cool-off” period in which the investment may be forfeited without conflict
- Investor is to receive on-going financial updates concerning the use of their money, among many other things
While many of the proposed ideas in Canada could not function as part of the JOBS Act, there must surely be potential for a hybrid regulation. If the decision comes down between a database or “self-attestation”, which would you prefer and why?