The McHenry Do-Over: Summary of the Interim Draft

The US equity crowdfunding legislation needs a do-over, and I have proposed one.

That draft do-over already needs an update, to implement the concept of an Individual Crowdfunding Account, or ICA. The point of the ICA is to make the crowdfunding investor responsible for her own investor protection.

But before we update the do-over, let's summarize the top four ways it would improve Title III of the JOBS Act.

1. Each investor's annual equity crowdfunding limit would be a flat figure, and would not vary with her income or net worth.

There are at least two merits to this change: it would be simpler to follow; and there would be no need to inquire into, let alone verify, an individual's income or net worth.

2. Funding portals would not be required to register with the SEC or any regulatory body.

Cash management would be outsourced to a third-party custodian, and the main functions of the funding portal would be to standardize deal terms and permit investors to communicate with one another and with the issuer.

Funding portals should otherwise have almost the same flexibility enjoyed by online angel platforms under Title II. The purpose of not regulating funding portals would be to encourage experimentation.

3. The requirement that issuers provide audited financial statements would be eliminated.

Issuers would be required to provide a cap table, a redline of the final deal documents against the funding portals standard templates, and disclosure schedules against the standard reps.

4. Title III's new standard of liability for material misstatements and omissions would be eliminated, and replaced by a bar on claims by any investor who falsely certified as to her ability to participate.

Responsibility for investor protection, to have any chance of being effective in a framework which must not be burdensome on new and small issuers, will have to become the responsibility of the investors.

The mechanism of the Individual Crowdfunding Account, invented for this purpose, has yet to be worked into the draft do-over.

More to come.