The U.S. Securities and Exchange Commission, which could not see the Bernie Madoff right in front of it, may soon have to oversee thousands of micro-Madoffs.
The JOBS Act signed last week by President Barack Obama authorizes “crowdfunding,” a kind of mashup of social media and small investing intended to give entrepreneurs easier access to capital so as to Jumpstart Our Business Startups. Get it?
The bill also changes laws governing private placements of securities and allows small banks to bring in more investors, a provision potentially helpful to several Spokane-area banks.
Currently, banks can have no more than 500 shareholders before having to register their stock. JOBS raises the limit to 2,000.
But crowdfunding is generating all the buzz, pro and con.
Entrepreneurs seeking as much as $1 million will be able to bypass traditional sources of money, such as friends, banks and angel investors, and take their business pitch directly to anyone with up to $10,000. With interest rates at historic lows, the promise of much bigger returns will be tempting.
Theoretically, Web portals that now vet charitable contributing, for example, would reconfigure their software tools to expand into the business space. New portals are already raising money to become crowdfunding mediators.
There are anecdotal accounts the process works. There always are.
The SEC, meanwhile, has nine months to draft regulations that would impose some order on this new market. Portal owners are developing a self-regulatory organization.
Crowdfunding supporters believe the Internet’s power to finger the bad actors and get the word out quickly may be all the policing required.
State securities regulators are not so sure. They object strenuously to the crowdfunding model, not least because the law bars states from reviewing offerings that will come with little of the disclosure required of conventional public stock sales. The states will get to clean up the mess on the back end, when con artists and other fraudsters hiding behind bogus portals and misinformation have done their worst.
Ultimately, the North American Securities Administrators Association predicts, the level of noise in the marketplace will make crowdfunding dysfunctional for entrepreneurs and a grand disappointment to small investors looking for the next Instagram, which was purchased Monday by Facebook for $1 billion a little more than one year after launch.
Democratizing Wall Street sounds great, but venture capitalists tell us they count on one or two major successes to offset losses on most companies they back. Will even the best-managed portals do as well? Will an overextended SEC even notice?
You’ll just have to be careful what crowd you run with.