THE UNITED STATES’ NEW CROWDFUNDING RULES: A PANDORA’S BOX?

Section 5 of the Securities Act of 1933 prohibits the sale of (or offering to sell) securities in interstate commerce unless they are registered with the Securities and Exchange Commission or are eligible for an exemption from registration. The act would thus prohibit a person from attempting to sell stock over the Internet unless such person was willing to incur the cost and delays associated with the registration process. The United States' Jumpstart Our Business Start Ups (JOBS) Act of 2012 creates an exemption from registration for offerings up to $1 million (over a 12-month period) which may be solicited in a limited fashion over the Internet. A variety of conditions apply, such as that the offering be conducted through a registered broker or "funding portal" (a new construct in the securities laws) and that the securities issued generally cannot be resold for one year. The great concern is whether the groundbreaking new exemption will become an invitation to fraud. Many consider the legislation "rushed" and "poorly drafted," providing inadequate safeguards for the protection of vulnerable, unsophisticated investors. This paper identifies the factors that led to the enactment of the JOBS Act, considers the eligibility requirements for the new registration exemption, critiques the measures intended to protect small investors, and offers suggestions to enhance the anti-fraud provisions without undermining the salutary aspects of the new law.