The proposed SEC rules consider crowdfunding portals “issuers,” meaning that the portals will be held liable for businesses raising money on their sites. If a business campaign to raise money is fraudulent, the portal will be held responsible. At the same time, portals are not allowed to give “investment advice.”
“The proposed rules put funding portals between a rock and a hard place,” said Kiran Lingam, general counsel for Seed Invest, an equity crowdfunding platform which currently deals only with accredited investors, in a letter to the SEC.
Only a few portals would survive the regulatory environment. The combination of regulatory burdens will result in a very limited pool of portals, according to letter submitted to the SEC by the Small Business and Entrepreneurship Council, an advocacy group with over 100,000 members.
“The combined regulatory and liability risks are far too great under current proposed regulations to expect a vibrant funding portal marketplace. That means less choice for issuers, as well as higher costs. Fixing the proposed regulations to provide clarity when it comes to liability and discretion on the funding portal’s part will allow for innovation, competition and accountability in the portal space,” said Karen Kerrigan, president and CEO of the SBE Council in her letter to the SEC.
Kerrigan says the SEC has estimated that it could cost as much as $400,000 just to meet required regulatory hurdles to open an equity crowdfunding portal.
Further, under the SEC’s release, a portal would need to demonstrate affirmative ‘due diligence’ efforts as a defense to an investor suit for a material misstatement or omission by the issuer.
“Because funding portals operating under Title III will present only small offerings of less than one million dollars, the cost to conduct an extensive review of each offering would be high relative to the small offering size,” said John Hamilton, the president of City First Enterprises, a Washington D.C.-based community development center.
“These due diligence costs would make it challenging for portals to post offerings that could not support fees large enough to cover the costs, limiting the number of potential investment opportunities and shrinking the amount of capital made available through crowdfunding. This in turn would diminish the job creation sought by the legislation.”
As written, portals are in an “untenable catch-22,” said House Small Business Committee Chairman and Representative Sam Graves (R, Mo.) in a letter to the SEC. “In order to achieve the appropriate balance of creating a usable crowdfunding model for small businesses while providing adequate protections for investors, the Commission should remove the liability placed on funding portals in the proposed rules or permit them to curate offerings. Otherwise it is highly improbable that any rational business would establish a web portal in the heads-you-win, tails-I-lose environment. And without web portals, there is no crowdfunding under Title III of the JOBS Act.”