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63 Emory L.J. 127 (2013-2014)
The Anti-Crowd Pleaser: Fixing the Crowdfund Act's Hidden Risks and Inadequate Remedies

handle is hein.journals/emlj63 and id is 135 raw text is: THE ANTI-CROWD PLEASER: FIXING THE CROWDFUND ACT'S HIDDEN RISKS AND INADEQUATE REMEDIES ABSTRACT A new form of startup financing is poised to turn the world of early-stage financing on its head. The Crowdfund Act-part of the Jumpstart Our Business Startups Act of 2012 will permit middle-class citizens to invest online in startups for the first time. After the SEC finishes its rulemaking, equity crowdfunding modeled on the 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 funding portals. A swelling tide of scholarship, media reports, and security industry publications warns about the risk of fraud inherent in the online selling of equity shares in startups to unsophisticated investors. However, this literature largely omits discussion of the problems with the new civil liability provision included in the Crowdfund Act-an express private action provision that will raise the transaction costs of crowdfunding and ensnare unwary issuers in its liability trap. In an attempt to address the 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 the language of Section 12(a) (2) of the Securities Act of 1933, imposes liability on the 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 the defendant did not exercise reasonable care, even if loss causation, reliance, and scienter are not shown. This Comment analyzes the hidden transaction costs in the Crowdfund Act, particularly the 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 the high failure rate of startups, the difficulty of working with emerging technology, the

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