Bankless Times recently sat down with Bob Carbone, the CEO and Founder of the compliance control provider CrowdBouncer, a Platform-as-a-Service solution for JOBS Act compliance and back-end transactional processing for equity crowdfunding portals.He is also a board member of CrowdFund Intermediary Regulatory Advocates. We talked about the JOBS Act, regulation, and the future of the industry.
Do the delays in the implementation of the JOBS Act worry you?
Not in the long-term. Much of the delay was related to churn in leadership at the SEC and not substance of the JOBS Act. Chair Mary Jo White in her opening remarks during the SEC meeting to adopt Title II rules was strongly supportive of the new marketplace created by the JOBS Act, which bodes well for the long-term success and vitality of general solicitation and crowdfunding.
A recent study posits that burdensome regulations will have a negative impact on crowdfunding. What areas should be regulated and which ones left alone?
This is a very nuanced question, given the granular nature of securities laws. Philosophically, the SEC should regulate procedures and not substances. The SEC should not interfere with the types of companies, types of offerings, deal terms, or other specific aspects of a transaction–and so far the SEC has shown no intention of doing so. The SEC should regulate the procedures that enforce transparency and discovery in offerings and allow investors to make educated investment decisions.
Are you worried that some overregulation will occur that will negatively impact crowdfunding?
By and large, with respect to Title II of the JOBS Act, I think the SEC has struck a fair balance by requiring that “reasonable” safeguards be taken to ensure investors are accredited. However, I feel that the recent proposed changes to Form D filings and the requirement to file all general solicitations with the SEC will create costs and friction that have no real value-add from a regulatory standpoint. These changes appear to be largely a data mining expedition into activity in the marketplace and not new protections.
What advice would you give to a new crowdfunding portal or business planning on utilizing crowdfunding during this waiting period for the JOBS Act to become more crystallized?
Think about differentiation. The space for both portals and issuers is quite crowded. If you don’t have a first mover advantage, differentiation in features, market segment or approach is necessary to attract sustainable deal flow and capital. Be able to answer the question, “What is it that you do better than any other portal?”
New sites are popping up seemingly daily and many do not succeed. How do such fluctuations affect the reputation of the industry?
There is attrition in every marketplace and attrition is a function of competition, which should reflect well on the reputation for the industry. The healthiest marketplaces have robust competition because competition spurs openness and innovation. I would be more worried if there was a dearth of enterprises coming to market.
Are there common mistakes that many crowdfunding sites make?
We don’t have a big enough sample set to glean why some portals survive and some fail at this point. A common denominator is always capital, but it’s going to take longer to determine what strategic decisions proved fruitful and which proved fatal for some enterprises.
I recently interviewed Christine Farnish from the British P2P Finance Association. We discussed the possibility of the various industries governing bodies or overseers collaborating or sharing information in some way. Do you see merit in doing this? If so, what are some areas that would benefit from this attention?
The JOBS Act is, in many ways, about breaking down barriers to capital formation. I think all of us envision a marketplace without geographic barriers one day and in the interest of working toward the convergence of securities marketplaces, I think it is important to share information about the efficacy and costs of regulatory measures, given the nuances among regulatory regimes from nation to nation.
This is an exciting time to be involved in the crowdfunding industry, as it is just at its beginning. What are the most likely routes you see it headed in in the near future?
I see two divergent paths. I see portals that want to earn a cut of the capital they raise for an issuer and affiliate themselves with a broker-dealer, or become a broker-dealer, in the mold of the conventional private placement paradigm. On the extreme opposite end of the spectrum, I see some portals disrupting that practice with a BYOC (bring your own compliance) model and offering their services in raising capital for issuers for free and finding other things to monetize, like the data they collect.
What are some pitfalls the industry is most likely to have to address in the years ahead?
We live in a world where information security is paramount. The use of the Internet to facilitate securities offerings raises real needs for responsible information security given the sensitive nature of investor and issuer financial information. A challenge to the industry will be ensuring that all market participants in this complex and expanding ecosystem subscribe to best practices in ensuring information security is locked down.
What are some areas that are currently receiving little attention from crowdfunding that you see as fertile ground for the industry in the coming years?
Compliance. Most crowdfunding portals have focused on the visible marketing aspects of their sites and will now have to back and fill the necessary processes to meet compliance pain points. Economizing and automating these processes to diminish costs and friction created by securities laws will be of tremendous value.
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