Crowdfunding for Equity Solutions: INVESTOR PROTECTION


CFIRA representatives have already met with the members of the Corporate Finance, Trading and Markets and Office of the Compliance Inspection Divisions of the SEC. Our interest was to hash out new rules and regulations governing crowdfunding. The process is ongoing, and this meeting was just the start. In this series, we’ll lay out some of the important points covered, our concerns and suggestions.


Any workable crowdfunding regulation will require an investor protection mechanism. We advocate relying on transparency and fraud prevention mechanisms already in place for charities and reward-based markets as a starting point. This basic structure should then be augmented with additional protections such as: portal registry, background and securities enforcement history check, required investor education and due diligence requirements.

Some of the elements suggested to protect investors are:

  1. Funding portal register, similar to Broker-Check. This should allow easy checking for registration status;
  2. Whistleblower program similar to existing programs at the SEC, but scaled to the smaller amounts expected;
  3. Third party escrow
  4. Due diligence requirements with these key components:

a) Background and history check for registrant, scaled to funding amounts;
b) Education of potential investors on crowdfunding generally;
c) Survey investors individually to verify their understanding of the risk they are taking in general and on this particular deal.

As with all investment vehicles, the trick will be to balance regulation against the cost of compliance. For this reason, many of our suggested practices need to be scaled to the expected market. Since one of the advantages of crowdfunding is a diverse investor base with small, but cumulative, investments at risk, the regulatory costs can quickly balloon and kill returns.

To avoid fatal regulatory hurdles for the industry, we recommend the burdens be placed generally on those issuing the investment opportunity and minimized for investors. There already exists a method to do this: the internet itself, where disclosures and information can be a simple click away and investment tracking (on both sides) can be automated.

This article was written by David Drake of the Soho Loft.   Read the rest of this weekly series on what you need to know about crowdfunding.

About the author: David Drake

David Drake is the founder and chairman of LDJ Capital, a private equity firm based in New York City USA, and of The Soho Loft, an event-driven financial media company. He is a  founder and former executive board member of the US Crowdfund Intermediary Regulatory Advocates (CFIRA) and the US Crowdfunding Professional Association (CfPA).  Fluent in 6 languages and born in Sweden, he is a strong advocate of innovative investing such as the US JOBS Act (Jumpstart Our Business Startups Act), lobbying for it in both the USA and at the EU Commission. He was a U.S. Commerce Department delegate at the Transatlantic Economic Council forum in Brussels and Rome on July 2012 where he met with european ministers and national legislators.  David presents regularly as an expert on financial innovation and impact investing at 150+ annual and international events.  He writes regularly for a number of online publications including Forbes.com, peHUB.com and Equities.com.  David Drake also hosted the HBS Club of NY, Trail Blazers and Best Buddies Carnegie Hall Charity events for many years.

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