A Rebuttal to the New York Times: Why Give Crowdfunding “Investors” Trinkets When You Could Give Them Returns?

[Editor’s Note: 99% of the time, I am an avid fan and reader of the New York Times. This past Sunday, I was thrown by the comments of the NYT’s editorial team in an op-ed commenting on the SEC’s forthcoming Title III rules on crowdfunding. Except for using Facebook’s recent announcement to purchase Oculus VR, the timing for the piece seemed a bit out of left field. I reached out requesting a rebuttal to the NYT’s op-ed.]

From The New York Times Editorial Board – March 29, 2014:

“Currently, only high-net-worth, high-income investors can legally invest in start-ups through crowdfunding sites. But soon, legislative and regulatory changes will open the sites to everyone.

That is where the Securities and Exchange Commission, with its explicit mission to protect investors, is supposed to come in. But the agency’s proposed crowdfunding rules, to be finalized in the months ahead, are a joke.”Full Article

A Rebuttal to the New York Times:
Why Give Crowdfunding “Investors” Trinkets When You Could Give Them Returns?
By Chris Tyrrell

The recent $2 billion acquisition of Oculus by Facebook is an ideal example of why continued delay in the release of final Title III crowdfunding rules is a bad idea. If Title III had already been in place, the contributors to Oculus would be receiving a return on their investment, instead of just thank you notes and “rewards”.As the second anniversary of the JOBS Act approaches, Title III crowdfunding is waiting for the Securities and Exchange Commission to pass the final rules empowering this new form of capital formation.
 
The New York Times takes issue with the draft securities crowdfunding rules, suggesting that funding portals that facilitate capital raises under the new law do not have to do enough to protect investors, and that the SEC is somehow asleep at the switch.Nothing could be further from the truth.

Funding portals are highly regulated. They have mandatory duties to educate investors on specific and general risks of crowdfund investing, and they have to verify the investors have actually learned the information provided. They have an obligation to run background checks on issuers and their principals. And they have significant disclosure requirements mandated by law and regulation.

Investors, too, have a high regulatory burden. They have to go through a formal process (much like creating a brokerage account) to receive investment information from a funding portal. There is a cap on how much an investor can invest in all crowdfund securities, across all companies, in any twelve month period. For many investors, it’s as low as $2,000.

Finally, issuers have significant regulatory and legal requirements. Besides the background checks they and all of their significant investors and officers must undergo, they can only raise $1 million per year. And they can’t advertise their raise directly – they have to send people to the portal. The regulations require that all investor communications go through the portal so that potential investors may read each others’ commentary regarding a particular investment.

The New York Times’ concerns that the SEC is abrogating its duty of investor protection are misplaced and misinformed. SEC staff and commissioners, with the input of stakeholders from all camps, have gone overboard to make sure that the regulations balance the concerns of capital raisers and investors.

The JOBS Act was a watershed moment in US securities law. Everyone, from investors to small business owners to job seekers can find something to celebrate in it. It liberates capital that will grow the economy and create jobs.

Chris Tyrrell is the founder and CEO of OfferBoard—an investment platform that leverages the technology of the Australian Small Scale Offerings Board (ASSOB)—the world’s oldest small equities funding platform—to help companies raise capital through Regulation D securities offerings. Chris is also the chairman of Crowdfunding Intermediary Regulatory Advocates (CFIRA), the leading advocacy organization for the equity crowdfunding industry, and a board member of ASSOB. 

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