Crowdfunding: Maximizing the Promise and Minimizing the Peril

Aug 27, 2012
Publisher: Milken Institute

Thanks to the Internet and social media, we can now ask "the crowd" for help. Companies and individuals increasingly approach the crowd for creative solutions to social or business problems (crowdsourcing) or for financing a project, venture or cause (crowdfunding).

At a roundtable discussion in July 2012, participants addressed key questions on the use, impact, and regulation of crowdfunding, specifically through the sale of debt or equity as a mechanism for raising capital. The event was hosted by the Milken Institute's Center for Financial Markets, in partnership with the Georgetown University Law Center, in Washington, D.C.

The purpose was to help inform the public and the Securities and Exchange Commission's rulemaking process in advance of the SEC's December 31, 2012, deadline for issuing final rules and regulations implementing Title III of the Jumpstart Our Business Startups Act. The JOBS Act, signed into law in April 2012, creates a crowdfunding exemption to current securities laws and registration requirements.

Roundtable participants explored creative uses and applications of securities crowdfunding, considered the limits and leading criticisms of the new exemption, and worked through different regulatory approaches that could help to unlock the promise of this new capital-raising mechanism, while minimizing the possibility of fraud and abuse.

Although views diverged on the degree to which the SEC should regulate issuers and crowdfunding platforms, participants agreed that the final regulatory regime should not stifle the exemption's potential to create jobs and spur economic growth. What remains to be seen, however, is whether crowdfunding will mark a major turning point in an ongoing democratization of financial markets, or whether the benefits of the exemption will be muted by regulatory burdens, concerns about fraud, high startup failure rates, and lack of investor and issuer sophistication.