Crowd Funding: SEC Trend?

The current Administration of course is suspicious of government regulation.  The Acting SEC Chair, Michael Piwowar, a conservative Republican who has been on the Commission for a long time, has suggested that the SEC may further deregulate crowd funding to facilitate access by small business to broader sources of capital.

In remarks this week to the SEC-NYU “Dialogue on Securities Market Regulation,” Piwowar speculated that companies benefited by crowd funding might not otherwise find financing, while the JOBS Act had authorized crowd funding to reflect bi-partisan Congressional support to empower entrepreneurs in this very fashion.

Crowd funding has been legal at the Federal level for less than a year, but it has been very sparingly used.  Only 163 deals have been offered over the mandatory “funding portals” and only 33 have completed their raises to the tune of only approximately $10 Million.  The Dialogue aims to evaluate experience to date; Piwowar is suggesting he may look for ways to juice up this approach.

It took about four years after the JOBS Act for the SEC to enact Rules permitting crowd funding, and the reason is that crowd funding solicits money from poor people for small projects about which precious little analytical information is available.  Securities professionals typically view these kinds of small retail investors as providing “dumb money” and not the kind of support emerging companies need.  Since most emerging companies seem to fail, inducing poorer investors to inject money into them may sound like democracy in action but may have negative unintended consequences.

The data to be generated may well be informative, but should be analyzed critically based on the facts, not in terms of advancing a philosophical agenda of deregulation.   Is there a “wisdom of the crowd” in this arena?  Those of us who work regularly with investors in early stage companies know that even sophisticated diligence on well-conceived enterprises are prone to failure, which is why a smart portfolio consists of many “bets” in the hope that at least some of them produce profitable returns.



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