Crowdfunding is a method of raising capital in small amounts from a large group of people using the Internet and, increasingly, social media. While this is currently a popular form of fundraising for cultural and other non-profit organizations, it may soon be a viable way for entrepreneurs to raise funds for small business corporations, if the Entrepreneur Access to Capital Act, a bill recently passed by the U.S. House of Representatives, is turned into law.
The bill would allow businesses to raise funds up to $1 million over the Web without registering with the U.S. Securities and Exchange Commission (SEC). Those in favor of the bill argue that it would be a boon for small business development and help stimulate the economy, but lack of SEC regulation could also be a problem, according to Thomas Lee Hazen, Cary C. Boshamer Distinguished Professor of Law at UNC School of Law.
Hazen’s recent article “Crowdfunding or Fraudfunding? Social Networks and the Securities Laws – Why Any Specially Tailored Exemption Should Be Conditioned on Meaningful Disclosure” (North Carolina Law Review, forthcoming) reviews recent attempts to exempt crowd funding efforts from the existing security laws.
“While many of the proposals would encourage small business financing, they do not adequately consider investor protection,” says Hazen. “They would create too great an invitation to fraudsters and scammers.” He argues, though, that the crowdfunding bill pending in the Senate is a step in the right direction to the extent it is conditioned on disclosure to investors.
“Exposing unsophisticated investors to risky investments without adequate disclosure unduly sacrifices investor protection goals to the perceived need to lower the disclosure barriers for small businesses and crowdfunding techniques,” Hazen concludes in the paper. “If history teaches us anything, the lesson is that social media technologies increase rather than decrease the potential for fraud.”
Hazen will present his paper at the November 18 North Carolina Law Review Symposium, “Social Networks and the Law.” Hazen’s article was quoted in a November 14 Baltimore Sun article on the proposed bill and was featured on the Change Crowdfunding Law blog.
Hazen is available for comment on this topic. For assistance in reaching Hazen, please contact Allison Reid, assistant dean for communications, at 919.843.7148 or firstname.lastname@example.org
-November 16, 2011