July 12, 2021

Crowdfunding: A Compliance Disaster?

According to a recent study, there is an epidemic of regulatory non-compliance in crowdfunding offerings so great that the author says it calls into question the continued viability of the crowdfunding experiment. Here’s an excerpt from the abstract:

The JOBS Act of 2012 launched a number of experiments in the regulation of securities offerings. The exemption it created that allows online equity crowdfunding offerings to retail investors garnered the most attention, in part due to widespread concerns regarding the potential for fraud and abuse. More than three years after the first crowdfunding offering, no empirical analysis of compliance has been conducted that would debunk or confirm critics’ concerns. This Article plugs that gap by analyzing a sample of 362 crowdfunding offerings and evaluating compliance with some of crowdfunding regulation’s simplest, most fundamental regulatory requirements.

During the first 13 months of crowdfunding, almost half of issuers failed to file complete financial statements that met the applicable standard of review, barely one-quarter of issuers that were required to file two annual reports did so, less than 15% of issuers timely filed the final amount raised in their offering, and the only data point on Form C that was reviewed was, far more often than not, substantially inaccurate. Finally, the third-largest crowdfunding funding portal may be violating the prohibition against a funding portal’s giving advice. In short, these findings reveal a deeply embedded culture of noncompliance.

In light of the SEC’s decision last year to raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million and to liberalize the rules on investments by both accredited & non-accredited investors, these allegations are pretty alarming. They become even more alarming after taking into account projections that the global crowdfunding market will grow by nearly $200 billion over the next four years.

John Jenkins