Making Whoopi as Small Investors Absorb the Risk: Susan Antilla

These days, choosing business interests over investor protection is so popular that even celebrity liberal Whoopi Goldberg is pushing for softer securities laws.

Goldberg “really is about the underdog,” and is sympathetic to the problems of small business owners who can’t get financing, her business partner, Tom Leonardis, told me in a telephone interview last week. That’s why the Oscar-winning actress and talk-show host is backing an effort to get the Securities and Exchange Commission to ease regulations that frustrate a money-raising technique called crowdfunding.

This time, Whoopi may have picked the wrong dog.

Crowdfunding is a popular way to raise money online from individuals. It started as a way for artists to get fans to help underwrite music tours and films, and today has expanded to things like collecting money for a patient’s medical procedure or raising venture capital for an entrepreneur’s new idea. In its most benign form, the recipient of crowdfunding gets donations of as little as $5, and rewards contributors with tokens like a coffee mug or a thank-you note.

The key word is donations, not investments. If crowdfunders were to offer investment returns instead of coffee mugs, they would have to register with the SEC or their state regulators. That would mean “tens of thousands of dollars and countless hours completing forms and filing them,” according to a petition to the SEC that Goldberg endorsed on her Facebook page earlier this month. Leonardis said Goldberg was on vacation and not available for comment.

Disclosure Burdens

Crowdfunders have a solution to the aggravation of regulation. Forget the forms. Forget the filing. Stop badgering entrepreneurs with all those demands for regulatory scrutiny. That disclosure stuff is downright un-American at a time when entrepreneurs are struggling to pull a few bucks together.

In other words, let the small investor absorb the risk of deficient disclosure so that entrepreneurs can get easy capital.

The push to get a regulatory break for crowdfunders comes at a time when small business is looking to relax other securities law exemptions that are already on the books, says A. Heath Abshure, commissioner of the Arkansas Securities Department and chairman of the corporate finance section of the North American Securities Administrators Association, an organization of state regulators.

Congressional Permissiveness

Earlier this month, the House Committee on Financial Services proposed a law that would make an existing exemption to the securities laws, Regulation A, even more permissive. The exclusion, which now lets companies make securities offerings of $5 million or less by filing simplified, unaudited financial statements with the SEC, would balloon to $50 million under the draft bill.

The petition Goldberg is backing would create a new way to sell securities without what it calls “costly and time-consuming filings.” Sherwood Neiss, a Florida entrepreneur who wrote the petition, says business owners who want to attract money on a crowdfunding site should be allowed to raise as much as $1 million under his proposal, but that the public is protected because he would put a cap of $10,000 or 10 percent of adjusted gross income on the amount any one person could invest.

Abshure says it’s exactly that sort of private securities offering that makes up most of the fraud that keeps his investigators busy.

Small investors bore the brunt of the financial crisis, says Abshure, and crowdfunding promoters are proposing we rebuild the economy by subjecting those investors to more risk.

Costly Compliance

Profounder, a crowdfunding website, has moved beyond the donations idea and helps raise money for entrepreneurs who offer investors a cut of any revenue. Yet it operates within existing securities law exemptions, says Profounder President Dana Mauriello, assisting issuers with filing the proper documents at the state level. Neiss says state law requirements ”often offset any costs saved by the federal registration exemption.”

Crowdcube, based in Exeter, England, calls itself “the world’s first equity-based crowdfunding community,” though only U.K. residents can invest.

Investors are sufficiently savvy that the law should change, Neiss says. More than half of Americans are invested in the stock market today, compared with 4 percent when federal securities laws were written in 1933, he says. Neiss says this matters because it shows “the majority of investors understand the basics of investing.”

‘Degree of Trust’

Owning stocks is correlated with knowing what you’re doing? Who knew?

Neiss says he’s heartened that the crowdfunding masses can vet companies and talk to one another about it. “Social media has proven it can lead to a degree of trust,” he says. Yet the trust thing can work against the crowd as easily as it works for it. Just ask any regulator who’s had to mop up the mess after an affinity fraud, where a scamster skips town with the money he bilked from members of his ethnic, religious or professional community.

If there are a few bad apples, it is, after all, only $10,000, or 10 percent, of an investor’s adjusted gross income at risk here, so how bad could it be to relax the rules? “Anyone can go to Vegas and have $10,000 and lose it,” says Neiss.

Right. Gambling. Crowdfunding. Two ways to lose your money without getting a disclosure document. At least in Vegas you can catch a Whoopi Goldberg show and maybe even get a free drink.

(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)

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