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U.S. Senate Begins to Move on Crowdfunding

On Tuesday, March 6, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing on Spurring Job Growth Through Capital Formation While Protecting Investors, Part II.  There is a stated intent to take up the capital formation bills in the near future.  Crowdfunding is one of several areas being considered to improve the capital formation climate.

Unlike the House version of the crowdfunding bills, there appears to be consensus in the Senate Committee that crowdfunding must be handled through an intermediary and not by the company seeking to raise capital.  Much of the discussion centered on the level of accountability and liability to impose on the intermediary.  Is the intermediary's role to facilitate the capital raising process, with basic responsibility for weeding out bad actors, background checks and the like?  Or does the intermediary assume some responsibility for making sure that the information provided to the investors by the company is accurate (similar to the liability imposed on broker-dealers)?

In our opinion, imposing significant risk of liability on the intermediaries will defeat the prospective benefits of crowdfunding, as it will force intermediaries to significantly increase the cost to companies to participate on the crowdfunding website.  Intermediaries will have to be compensated for the risks they assume and the costs they incur in mitigating those risks.

Categories: Crowdfunding, Venture Capital/Funding

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