Diligent crowdfunding

Over on the CrowdCafe this week, Jonny Sandlund is trying to make sense of "due diligence" in the context of investment crowdfunding.

The first thought that may come to mind may be, "hey, isn't the point of crowdfunding that the crowd vets the deal?" But, reading Jonny's post, you start to appreciate that the very presentation of a deal on a platform - first, the fact that it is listed, and then, the manner in which information about it is presented - is likely the byproduct of a process of some manner of diligence, selection that precedes the vetting of the crowd.

DiligenceThe implications of the questions Jonny is asking - "Who’s doing the diligence: the Crowd or the Platform? When in the process? And how?" - moves right to the heart of the regulatory conundrum that has not been resolved for non-accredited investment crowdfunding under Title III of the JOBS Act, and that may have been re-activated for angel crowdfunding platforms with the recent SEC staff FAQ that totally mangles the federal broker dealer exemption under Title II of the JOBS Act.

For Title III crowdfunding, the trend seems a regulatory push toward, and the nascent industry's acquiescence with, the need for funding portals to be regulated more or less as broker dealers. If even elements of web design or going to be regarded by regulators as "investment advice," then there is little point in trying to defend a notion of "curation" that is independent of engaging in securities transactions.

We had thought "curation" survived under Title II and that, for platforms restricted to accredited investors, the aggregation of diligence chores was natural; the FAQ from SEC staff this month may be throwing those beliefs into uncertainty. The statutory language of Title II yet expressly contemplates that angel platforms may provide "ancillary services," including "due diligence" services.

But over in Title III, it's clear that funding portals are expected to do a fair amount of protecting of an investor, against the listing issuers and also, ironically, against the investor himself (the portal is, in effect, supposed to diligence the investor's crowdfunding limit across all platforms).

Photo: fhwrdh / Flickr.


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