State crowdfunding exemptions should not ask companies to collect information about an investor's income

Recent item from the Proskauer Privacy Law Blog:

"California Assembly Member, Bonnie Lowenthal, recently introduced the 'Right to Know Act of 2013' (AB 1291), which would require any company that retains a  California resident’s personal information to provide a copy of that information to that person, free of charge, within 30 days of the request."

Can you imagine a tiny, five person startup company dealing with such requests from the 1,000 investors it raised an aggregate couple hundred thousands dollars from?

Modest w2To keep privacy law compliance costs from being a major use of proceeds item in any investment crowdfunding offering, state legislators should be smart about not exposing sensitive personal investor information to crowdfunding issuers, beyond the kind of information state corporate codes already require companies to keep.

For instance, a company must keep a shareholder list, and should ordinarily collect an investor's street or email address so it has a way of sending her those notices that the corporate law or the company charter require.

But that's about it.

Requiring startups and small businesses to collect information about a given investor's income or net worth - not to mention requiring startups and small businesses to then hire resources to test the veracity of such information - is the wrong investor protection in the wrong context. What such a requirement asks of the issuer is out of proportion to the funds being raised. Just as importantly, requiring startups and small businesses to gather such information exposes investors to the risk that highly sensitive information about them will be disseminated, either wilfully or through neglect or by accident.

All four of the state investment crowdfunding initiatives that we know of - the two regulatory exemptions in place in Kansas and Georgia, and the two bills introduced in state legislatures in Washington and North Carolina - have merits, will do well to borrow features of the others, and are (unlike the federal investment crowdfunding exemption for non-accredited investors) on the right track. But the initiatives that drop the income and net worth tests of the federal bill, those make the right call, sparing investors unnecessary exposure.

Photo: Chad Miller / Flickr.


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