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• W261052170 abstract "ABSTRACTA new form of startup financing is poised to turn world of early-stage financing on its head. The Crowdfund Act-part of Jumpstart Our Business Startups Act of 2012-will permit middle-class citizens to invest online in startups for first time. After SEC finishes its rulemaking, equity crowdfunding-modeled on success of rewards-based crowdfunding websites, such as Kickstarter and Indiegogo-will allow startups and eligible small businesses to raise up to $1 million over a twelve-month period by issuing equity shares to mom-and-pop retail investors through online portals.A swelling tide of scholarship, media reports, and security industry publications warns about risk of fraud inherent in online selling of equity shares in startups to unsophisticated investors. However, this literature largely omits discussion of problems with new civil liability provision included in Crowdfund Act-an express private action provision that will raise transaction costs of crowdfunding and ensnare unwary issuers in its liability trap. In an attempt to address fraud concern, Congress drafted this new civil liability provision as well as a detailed and extensive set of disclosure requirements for issuers to navigate. The new liability provision, which broadens language of Section 12(a)(2) of Securities Act of 1933, imposes liability on issuer and its officers and directors for false or misleading statements or omissions in any written or oral communication. A plaintiff need only prove that an untrue statement or misleading omission occurred and that defendant did not exercise reasonable care, even if loss causation, reliance, and scienter are not shown.This Comment analyzes hidden transaction costs in Crowdfund Act, particularly severe liability cost this provision imposes on issuers. Crowdfunded offerings present a new environment in which innocent but inexperienced entrepreneurs face increased risk of making a misstatement or misleading omission. Crowdfunded offerings confront a number of issues not faced by mature companies making public offerings, including high failure rate of startups, difficulty of working with emerging technology, entrepreneurial psychological predisposition to risk, a lack of sophisticated disclosure assistance, and a dearth of due diligence.This Comment argues that new liability provision not only will sweep too broadly-indiscriminately catching negligent entrepreneurs and fraudsters in its swath-but will also fail to provide an effective remedy for defrauded investors. Given relatively small amount of money in play in a crowdfunded offering and expense and difficulty of bringing a class action securities lawsuit, plaintiffs' attorneys are unlikely to pursue cases involving fraudulent behavior. This Comment concludes that best solution to both issues is to impose scienter as an element of civil liability provision while also awarding attorneys' fees to plaintiffs' attorneys successful on merits at trial. This solution will decrease up-front and hidden transaction costs for issuers and will incentivize plaintiffs' attorneys to pursue issuers committing fraud. Finally, this solution continues SEC's goal of balancing securities regulations to protect investors and integrity of market, while keeping transaction costs low enough to maintain utility of market as this revolutionary experiment in startup financing takes root.INTRODUCTIONWhen startup Pebble Technology founder Eric Migicovsky needed additional funding to take his invention, a smartwatch that pairs with smartphones and runs apps, from prototype to production, he started off on traditional road-he pitched his idea to established venture capital firms in Silicon Valley.1 But, as is frequently case, traditional venture capital firms turned Migicovsky down.2 Migicovsky's startup then took a new, but increasingly common, approach: it turned to the crowd for funding. …" @default.
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• W261052170 title "The Anti-Crowd Pleaser: Fixing the Crowdfund Act's Hidden Risks and Inadequate Remedies" @default.
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