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Crowdfunding for equity solutions Part 3: Know your crowd
HomeNewsCrowdfunding for equity solutions Part 3: Know your crowd

Crowdfunding for equity solutions Part 3: Know your crowd

News Desk
News Desk
January 31st, 2023
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David Drake of LDJ Capital continues today with his third article of his series regarding crowdfunding for equity solutions.

Documentation

Investor protection is a key part of any legislation that seeks to open up opportunities to the general public.

Along these lines, we’ve previously covered requirements and suggestions for education, fraud protection, transparency and a whistleblower program.

Section 302 also establishes investment limits to guard investors against catastrophic harm, and we offer our thoughts on this issue here.

The intent of the Act is to match invested amounts with net worth, so that investments are on par with the ability to suffer losses in the often risky new ventures and small company arena.

In principle, this is an important and worthwhile concern. However, we feel a distinction needs to be made between individual and institutional investors and not simply a general rule for the marketplace as a whole.

This can be accomplished by removing institutions from the definition of “person” for purposes of regulation.

An associated difficulty comes with data gathering and checking to ensure an individual is not exceeding the proposed limits. The method used currently in other investments requires the completion of a questionnaire and the awarding of the status of “accredited investor.”

This may be the only workable solution, as other due diligence requirements could cripple the marketplace with unworkable and expensive credit or background checks.

Even checking for exposure among different crowdfunding offers (across intermediaries) has practical difficulties, unless a registry is created to gather such data.

Clarification is also needed on limits in aggregate versus per-issuer limits.

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