How Congress Killed Investment Crowdfunding: A Tale of Political Pressure, Hasty Decisions, and Inexpert Judgments That Begs for a Happy Ending

In April 2012, President Obama signed into law the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (the “CROWDFUND Act”) as Title III of the Jumpstart Our Business Startups Act. The U.S. Securities and Exchange Commission (“SEC”) was compelled to promulgate enabling regulation to effectuate the CROWDFUND Act. That rulemaking has been slow in coming. During this period of delay, commentators have routinely denounced the postponement and expressed fear that the SEC’s rulemaking would unduly limit investment crowdfunding. This Article demonstrates, however, that it is principally the U.S. Congress that has limited the capacity of the CROWDFUND Act to foster capital formation for small businesses through investment crowdfunding. The provisions of the CROWDFUND Act, as enacted by Congress, create a significant cost structure that is not likely to be outweighed by the benefits of a crowdfunded offering conducted under the Act. Building on earlier work by Professors C. Steven Bradford and Stuart Cohn, this article explains the history and current status of the regulation of investment crowdfunding under the Securities Act of 1933, as amended (the “1933 Act”), identifies and describes reasons for despair about the current regulatory environment, and suggests a way forward. The way forward assumes, without further analysis, that the CROWDFUND Act demonstrates the inevitability — even if not the desirability — of a viable 1933 Act registration exemption for investment crowdfunding