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Regulators Straining to Figure Out How to Not Facilitate Frauds and Schemes With JOBS Act Rules

We knew back when the poorly named JOBS Act passed into law that it would provide more opportunities for financial schemers to re-open bucket shops and rip off their clients with investment scams than provide opportunities for employment. And regulators tasked with implementing the law now see the same problems, which has caused delays in the rule writing.

The JOBS Act gave the SEC until Dec. 31 to determine how to implement and enforce new rules allowing entrepreneurs to raise up to $1 million in equity through online crowdfunding platforms. The platforms are intended to help start-ups secure small amounts of capital from investors without the costs and time required to register with the SEC.

However, the agency still must determine which rules will give entrepreneurs access to as many potential investors as possible without sacrificing the protections meant to help people avoid fraudulent business propositions. For instance, regulators are still working on ways to ensure investors are educated on how to evaluate crowdfunding proposals and how to monitor the amount of money investors are pouring into companies through online portals (the law places a tiered cap on crowdfunding investments based on individuals’ income levels).

There is also a great deal of uncertainly concerning the standards for “registered funding platforms.”

“There are folks that think a crowdfunding portal is just a notice board placed in the middle of the village green, where you put notices for a missing cat, securities for sale, and that’s all,” Sara Hanks, CEO and co-founder of CrowdCheck in Alexandria, said during the forum Nov. 15, later adding that many of the teams behind today’s crowdfunding platforms don’t seem to realize that “they’ve entered the most regulated industry in the history of anywhere in the universe.”

There’s a distinction to be made between crowdfunding enthusiasts and those who will use these new rules to engage in ripoffs. I think people genuinely see potential in applying the techniques of Kickstarter to raise initial capital for worthwhile initiatives. They tend to gloss over the fact that allowing, by law, so-called “emerging” companies to hide their business plans from the SEC for five years necessarily hides a lot of potential chicanery, and that attracting unsophisticated investors into the process just invites these kinds of schemes.

Crowdfunders are obviously upset that the new rules cannot take effect without the SEC and FINRA getting a close look at them. But that’s a small price to pay for a modicum of transparency and investor protection. And sadly, because of the contours of the law, it won’t be enough.

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David Dayen

David Dayen

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