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Senate Approves Crowdfunding, as Crowdfunds Rush to Take Advantage

posted May 22, 2013, 3:12 PM by Andrew Manzo   [ updated Jun 7, 2013, 10:02 AM ]
    The Senate voted this afternoon 73-26 in favor a bill that loosens SEC regulations in order to permit small businesses easier access to capital, thereby creating jobs. This bill passed despite an impassioned plea by Majority Whip Dick Durbin to extend debate and hold hearings on small business legislation. The Senate legislation amends the JOBS Act, which passed the House with overwhelming bipartisan support earlier this month, with language that would require SEC oversight of equity-based crowdfunding platforms. The bill now goes back to the House before being signed into law.

Durbin warned, “We will rue the day we ran this thing through the House and Senate without the appropriate oversight.” He argued that the only jobs being created by the act are those of “the new charlatans who are offering these types of investments.”

Even before the bill passed, one company began capitalizing on the foreseeable need for vetting crowdfunding platforms. Carl Esposti, founder of a consulting and market research firm Crowdsourcing.org, is part of a group that has created a Crowdfunding Accreditation for Platform Standards program “to ensure a secure and reliable experience” for investors.

Esposti and a self-assembled council of 11 industry experts, including Sherwood Ness, co-founder of Startup Exemption and The Crowdfunding Revolution author Kevin Lawton, invited more than 30 crowdfunding platforms to pony up $1,000 each to obtain accreditation. The council bases its approval on “qualification criteria” in four areas: operational transparency, security of information and payments, platform functionality, and operational procedures. Esposti says the $1,000 covers the accreditation process and the license to post a CAPS seal of approval on your website.

Eight organizations—Crowdcube (UK), Grow VC (Hong Kong), Crowdfunder (UK), GreenUnite (US), HelpersUnite (US), Symbid (Netherlands), Give A Little (NZ), and Fundrazr (US)–were awarded the CAPS badge, and another 20 are under review. Esposti said that “a couple that applied did not meet the standards.” He expects more than 200 crowdfunding platforms to apply for accreditation in 2012, and suggests that the CAPS program could serve as a model for the SEC’s crowdfunding regulatory framework.

David Bratvold, founder of the industry publication The Daily Crowdsource, says the CAPS program seems premature, and the wrong approach to preventing fraud. “It’s far too early to charge someone $1,000 to get certified,” he says. And, he notes, any swindlers would likely be the projects raising money, not the crowdfunding platforms that facilitate the process. He suggests that the kind of accreditation CAPS is promoting should be unnecessary. “The crowd regulates the crowd. If the "crowd" doesn't want to be a part of it, they won’t. The data show that most people who donate through crowdfunding already know the project they’re donating to. I’m more in favor of an open opportunity.”

But Bratvold believes the Senate’s amendment, which imposes investment caps, waiting periods, and accountability measures for companies, as well as SEC regulation of crowdfunding platforms, could be a good solution. Of course it remains to be seen if that can be done without destroying the open and innovative crowdfunding culture. And, in contrast to Senator Durbin’s concerns about investors being swindled, Bratvold says that, for now, it’s crowdfunding platform operators who should watch out for scams.