Crowdfunding for Equity Solutions: KNOW YOUR CROWD


Investor protection is a key part of any legislation that seeks to open up opportunities to the general public. Along these lines, we’ve previously covered requirements and suggestions for education, fraud protection, transparency and a whistleblower program. Section 302 also establishes investment limits to guard investors against catastrophic harm, and we offer our thoughts on this issue here.

photo1The intent of the Act is to match invested amounts with net worth, so that investments are on par with the ability to suffer losses in the often risky new ventures and small company arena. In principle, this is an important and worthwhile concern. However, we feel a distinction needs to be made between individual and institutional investors and not simply a general rule for the marketplace as a whole. This can be accomplished by removing institutions from the definition of “person” for purposes of regulation.


An associated difficulty comes with data gathering and checking to ensure an individual is not exceeding the proposed limits. The method used currently in other investments requires the completion of a questionnaire and the awarding of the status of “accredited investor.” This may be the only workable solution, as other due diligence requirements could cripple the marketplace with unworkable and expensive credit or background checks. Even checking for exposure among different crowdfunding offers (across intermediaries) has practical difficulties, unless a registry is created to gather such data.

Clarification is also needed on limits in aggregate versus per-issuer limits.

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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