Crowdfunding means raising funds over the Internet for artistic, charitable and other ventures by seeking small individual contributions from a large number of people with input from the wisdom of the crowd. It has not so far been (legally) used by entrepreneurs to raise capital. The proponents of the Jumpstart Our Business Startups (JOBS) Act1 touted the law as a means to create jobs by deregulating the capital raising process for small business by, among other things, allowing entrepreneurs to use the Internet to sell stocks outside of the restrictions of the securities laws. Opponents of the JOBS Act recalled the pump and dump scams that occurred pursuant to the similar Rule 504 deregulated offerings in the 1990s2 and insisted that various investor protection provisions be added to the law.3 The result is an internally contradictory statute handed over to the Securities and Exchange Commission (SEC) to rationalize through rulemaking.
Those who hoped for an essentially regulation-free field where small business owners could use the Internet to attract investors will surely be disappointed. The SEC’s crowdfunding rule proposals run on for 175 pages in the Federal Register PDF version, and have more than 1,000 footnotes and almost 300 requests for comments.4 The politicians and judges who have tried to put a halt to new federal regulations by imposing cost-benefit analyses on agencies and erecting other barriers to the rulemaking process, and who now favor a deregulatory rulemaking initiative, have been hoist by their own petards.
