Crowdfunding for Equity Solutions: DUE DILIGENCE



Intermediaries, as set out in the Act, will be required to obtain background and history checks on officers, directors and certain affiliates of the issuer. Our concern is that these provisions do not constitute an undue burden across the marketplace. If background checks were set in parallel with the size of the offering, this would give a scaling feature that might be necessary to keep smaller offerings feasible. And smaller offerings are expected to be, overall, a significant part of the crowdfunding landscape. A 20% shareholder in one issue shouldn’t automatically be required to meet the same level of background checks as one in a much smaller offering.

We would also like to see a safe harbor provision that limits liability for intermediaries who perform to regulated standards. These standards would be the least burdensome with automated checks, such as credit and criminal history, using existing technology solutions.

The balance to be struck is between a high level of fraud detection and investor protection, coupled with the lowest overhead, especially for smaller dollar amount fundraising. The parallel with broker-dealers is not a strong one. Funding portals should have a lower standard to meet because they have a role limited by statute. The goal is to find a commercially realistic solution and a safe harbor checklist that all portals can adopt.

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.

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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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