Common Sense Is Key to Crowdfund Investing Rules

new report by the Milkin Institute suggests regulators pursue a “common-sense approach” to regulation that balances the risks of securities crowdfunding with concerns over excessive compliance.

The Center for Financial Markets at the Milken Institute, in partnership with the Georgetown University Law Center, convened a roundtable discussion in July 2012 in Washington, D.C. Participants addressed key questions on the use, impact, and regulation of crowdfunding, specifically through the sale of debt or equity as a mechanism for raising capital. The roundtable discussion served as the foundation of the Milken report entitled “Crowdfunding: Maximizing the Promise and Minimizing the Peril.”

Securities crowdfunding was cited as a potential solution to raising capital at early stages. Participants offered a number of reasons why an entrepreneur/issuer might take advantage of the crowdfunding exemption, including:

  • Frustration with the costs and burdens of traditional methods of raising capital;
  • Lack of access to venture or angel capital due to participation in a non-high- growth sector or industry;Lack of access to venture or angel capital due to rural location;
  • Lack of access to bank lending;  and
  • Need for gap-financing.

They report also lists reasons, beyond the obvious goal of securing a financial return, why investors might find securities crowdfunding attractive:

  • Personal interest in the product or idea;
  • Psychic reward, including financial support for a cause or initiative with social purpose;
  • Ability to engage in entrepreneurial venture;
  • Potential to participate in newly democratized angel/venture capital opportunities.

The report notes that while views diverged on the degree to which the SEC should regulate issuers and crowdfunding platforms, “participants agreed that the final regulatory regime should not stifle the exemption’s potential to create jobs and spur economic growth.” General recommendations from the roundtable included:

  • Promoting basic investor education on crowdfunding platforms so risks are clear.
  • Requiring standardization of financial and reporting disclosures.
  • Encouraging efficient due diligence and review.
  • Clarifying that securities crowdfunding can work alongside other forms of capital-raising.
  • Ensuring that statutory individual investor caps are not circumvented.

The report added: “One thing is predictable, the roundtable participants agreed: while it remains crucial to address concerns over fraud and abuse, if the SEC creates overly burdensome requirements, then securities crowdfunding will suffer a premature death, and with it any promise it might have for spurring economic growth and job creation.”

The need to spur economic growth is reinforced by the increasing loss of confidence by American consumers in the economy. A new Gallup poll shows consumer confidence in August 2012 equaling the all time low for 2012.

(c) Gallup

Gallup reports that the Gallup Economic Confidence Index registered

“-27″ in August, matching the prior monthly low for the year, recorded in January. August’s reading is essentially the same as July’s -26; still, confidence has now slid 10 percentage points from the four-year high of -17 recorded in May.

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