Within the last decade, crowdfunding has become increasingly popular in today’s technological society. In the United States, there have beena reported 191 crowdfunding platforms; while global crowdfunding platforms have increased from $530 million in 2009 to $2.8 billion in 2012 . This new trend in venture capitalism enables everyday working Americans to become a part of the “next big” company. However, due to their lack of knowledge and familiarity with crowdfunding, these “rookie” investors should not dive into this world without properly assessing their risks. They should tend to err on the side of caution. Some investors are looking to make it big by discovering the next Google, Apple, or Amazon. Other investors’ main motivation is to support and promote a local business.
Federal and state crowdfunding legislation enables United States citizens to invest in businesses throughout this country. The federal crowdfunding rules and requirements find their source in the Jump Start Our Business Act (“JOBS”) and the Security Exchange Commission’s (“SEC”) rules and Regulations (this article will refer to the JOBS Act and the SEC rules as “legislation”). Within the legislation, several safeguards have been implemented to protect investors 1. These safeguards can be divided into three main categories. The first is the prevention of fraud and misrepresentations. The second category is ensuring that the investor is informed. Lastly, the third category seeks to make sure that there are rules in place that make the investors’ experience as enjoyable as possible.
While each of these safeguards works to provide consumer protection, the initial drafting of the legislation and rules will benefit from modification to strike a better balance between protecting the investor and allowing the issuer improved access to capital. This article discusses possible changes to the legislation that will maintain a sufficient level of consumer protection while easing the process for businesses to engage in investment crowdfunding.
Keywords: Crowdfunding, Online-intermediary (“OLI”), Depository Institution (“DI”), Colorado division of securities, securities exchange commission, Jump Start Our Business Act (“JOBS”), role of escrow agent.