Monday, a friend sent me a link to a weekend New York Times editorial which strongly condemned the SEC's proposed rules under Title III of the JOBS Act.
However, unlike the criticism coming from those in the nascent non-accredited crowdfunding industry, the NYT editorial board faults the SEC's proposed rules, not for being unworkable, but for not being restrictive enough.
I'll leave aside the Times' misconception that the faults lie in the agency's rulemaking rather than the legislation itself. In this regard, the editorial board makes the same mistake that non-accredited crowdfunding advocates, coming from the other direction, make. (Interestingly enough, at the ACA Summit last week in Washington DC, Rep. Patrick McHenry, the father of the original federal non-accredited crowdfunding bill, stated that Title III needed to be fixed legislatively, by Congress, not by rulemaking at the SEC.)
I'll also leave aside other aspects of the legislation and proposed rules which the NYT editorial board gets wrong.
Instead, I want to identify certain presumptions implicit in the NYT critique, for purposes of comparing and contrasting those presumptions with those underlying the critique of the very same proposed rules by non-accredited crowdfunding advocates:
Here are what I infer to be the NYT editorial board's presumptions:
- People of modest means or on fixed incomes will be scammed out of money they can ill-afford to lose.
- Even if a crowdfunded company turns out to be promising, later, more sophisticated investors will cheat the earliest investors out of fair returns.
- Reliance on participant representations and self-policing is a recipe for fraud.
Non-accredited crowdfunding advocates approach the subject from a variety of different subcultures, you might say: some our tech start up oriented; others are community activists; others have a small business orientation. But these advocates share at least one or more of the following presumptions:
- Startup and private company funding should be democratized in some meaningful way, and not remain the private preserve of the 1%.
- Friends and family should not be shut out of legally investing in the business of a nephew, or a child, or an aunt, or a colleague.
- More local dollars should circulate through local communities. Neighbors should be able to own a piece of the local restaurants, craft breweries, and other brick-and-mortar small businesses they support with their day-to-day commerce.
- People are motivated to crowdfund for reasons other than Wall Street-like fixation on financial return.
So, which set of presumptions are correct?
Both sets are correct.
And herein lies the problem with non-accredited crowdfunding under Title III of the JOBS Act: it does not pick a consistent worldview, but instead hedges each feature of the exemption as though the fears of each camp are certain to be realized.
I happen to agree with the New York Times editorial board. For purposes of a federal law which preempts state law, crowdfunding should be limited to accredited investors. Accredited crowdfunding is supported by Title II of the JOBS Act, and the changes to Rule 506 that have been implemented by SEC regulation under Title II. There are transition headaches here, to be sure, but so far these accredited crowdfunding reforms are enabling (some would say, ratifying) significant changes in how angel deals are syndicated.
And I happen to agree with the aims of most of the non-accredited crowdfunding adovcates, though I believe Title III to be a lost cause, not worth fighting anyway because the proper place for non-accredited crowdfunding exemptions is at the state level, where rules can be scoped with local conditions in mind.
Photo: Rep. Patrick McHenry addressing the 2014 Angel Capital Association Summit last week.