The JOBS Act: If You Build A Funding Portal, Will They Come?

William Carleton, Contributing Editor, VCExperts

The crowdfunding exemption of the JOBS Act contemplates three moving parts: companies raising up to $1 million a year; individuals investing from a limited annual budget; and brokers or funding portals, deputized to police the activity.

A lot of smart, ambitious and idealistic people are working on the funding portal leg of the stool. In fact, many are deeply engaged in building organizations for the nascent industry.

But if you build it, if you write the code to run a funding portal, anticipating you will register and be ready when the exemption becomes effective: what kind of companies and investors will show up?

On Asher Bearman's and Trent Dyke's DLA Piper blog, Andrew Ledbetter has an audaciously unsentimental assessment of why a tech startup with high growth ambition won't want to use the equity crowdfunding exemption. Here are excerpts of just three from among ten compelling reasons Andrew lists:

  • "An acquirer will be unable to buy the company using acquirer securities as consideration, since the acquirer would likely not have a viable exemption for issuing those securities to the target’s crowdfunded investors."
  • "The JOBS Act exemption provides that investors can sue to get their money back (with statutory interest) if the company’s disclosure to investors is inadequate. Giving adequate securities law disclosure is complicated, and the types of companies using crowdfunding may not be in a position to spend money on securities lawyers."
  • "The diligence issues associated with confirming securities law compliance in prior crowdfunding deals could be extensive. VC funds or other institutional investors may not be willing to incur those costs, or to risk bankrolling suits by crowdfunded investors."

Taking a view from the investor-protection side, the North American Securities Administrators Association (NASAA) has published a warning to the general public (thanks @JoeWallin for tweeting this). Among the reasons in NASAA's case that equity crowdfunding should be unattractive to investors:

  • "The information about the investment is limited to what is provided through the funding portal. Investors may need to rely on their own research to determine the issuer’s track record."
  • "Due to limited regulatory oversight over these offerings, investors may be left on their own to pursue costly private lawsuits when things go wrong."
  • "Crowdfunding investments are mostly illiquid and investors must be prepared to hold their investments indefinitely. It also may be difficult or impossible to resell these securities due to the lack of a secondary market."

Neither Andrew nor the NASAA warning are assessing equity crowdfunding from the perspective of the funding portal, of course. Those with ambitions to run equity crowdfunding portals include activists who want to liberate entreprenuers from the frustrations of how access to capital is "gated." Others are motivated by longstanding desires to build local community exchanges and advance the "local" movement (eat food grown locally; patronize local businesses that aren't chains; reallocate some of your 401(k) money into local businesses you can see, touch and patronize.)

Andrew and NASAA also do not raise the provocative possibility that crowdfunding dollars may go where banks, private equity funds, venture capitalists and angel investors fear to tread: big, bold, long term projects of fundamenal societal import that simply won't be attractive if ROI in the near term runs the agenda. Credit Fred Wilson for calling out this vision. We know non-equity crowdfunding works; it could be that adding an equity spoke to the crowdfunding wheel will help make that proven concept effective at big projects as well as small ones.

It's all in motion.

Photo by manyhighways/Flickr.

William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at