This past week, WSJ.com published an article that criticized investment crowdfunding, specifically Regulation A (Reg A+).
Reg A+ is a securities exemption that enables early-stage or smaller firms to raise up to $75 million. The security exemption requires an issuer to submit documents to the Securities and Exchange Commission so the offering may be “qualified” by the agency. Issuers may raise money online either using an intermediary or directly on their own platform.
The WSJ article described Reg A as a “shortcut” that “Allows Risky Startups to Raise Billions From Rookie Investors.”
The author focused on two specific issuers that have raised money online yet have yet to deliver their products to the wider market.
Today, Sherwood “Woodie” Neiss, an investment crowdfunding OG who helped to craft the language of the JOBS Act of 2012, the bipartisan legislation that legalized online capital formation or securities crowdfunding, has submitted a letter to the Editor in response to the article. Neiss has shared the missive, which counters the narrative the article pursues.
His response is republished below.
Dear Editor,
I am responding to your recent article, “The Shortcut That Allows Risky Startups to Raise Billions from Rookie Investors” (published on June 8, 2024). Not only did we play a pivotal role in writing the legislation for investment crowdfunding, but we also created the industry’s first data aggregator that collects information on all issuers raising capital online and tracks investor sentiment through the number of checks written and the dollar amounts invested. So, we have a much better idea of what is happening in the marketplace. Your article overlooks critical aspects and successes of equity crowdfunding, presenting a skewed perspective that emphasizes fear, uncertainty, and doubt.
Equity crowdfunding, particularly under Regulation Crowdfunding (Reg CF), has channeled more than $7 billion into local economies across the USA. These investments support local businesses, generate valuable tax dollars, and significantly contribute to job creation. Furthermore, equity crowdfunding has supported women and minority entrepreneurs far more than traditional venture capital (VC).
Unlike Regulation D (Reg D) offerings, Reg CF and Reg A impose stringent requirements to protect investors. Issuers under Reg A are mandated to provide audited financial statements and adhere to rigorous SEC disclosure requirements. Additionally, Reg CF issuers must provide annual reports to keep investors informed—another layer of transparency absent in Reg D offerings. In both these offerings, Retail investors are capped at how much they can risk.
Equity crowdfunding has facilitated over 8,500 offerings, allowing thousands of early-stage companies to thrive. These companies have raised over $2 billion, driving innovation and economic growth. These are the future seeds of innovation that very likely will be the next Google, Apple, or Nvidia. Successful examples include hundreds more than the two you used, but you only care to highlight them to the detriment of the others and an entire industry. Shame on you.
Your article needs to acknowledge the high failure rates of startups funded through traditional avenues such as VC and angel investments under Reg D. Highlighting the successes of equity crowdfunding, rather than focusing solely on potential risks, would provide a more balanced view of this vital financing mechanism. Equity crowdfunding democratizes investment opportunities, allowing ordinary individuals to invest in promising startups previously accessible only to accredited investors. It IS working, and thousands of investors stand to gain not only in terms of future profits but also by helping these companies grow and scale to the next level.
Equity crowdfunding is a transformative force in the financial ecosystem, driving local economic growth, supporting diverse entrepreneurs, and offering robust investor protections. A balanced perspective on this topic should celebrate its successes and contributions rather than perpetuating fear and doubt.
Sincerely,
Sherwood