Girl Scouts Sell Lots of Cookies: SEC Regulation of Title III Crowdfunding
I wonder whether the SEC understands that Title III investment crowdfunding is inextricably linked to social entrepreneurship. It is essential to understanding how a balanced approach for regulation is necessary in this area. Title III is a natural evolution of the rewards-based crowdfunding that has already established itself to be hugely successful and largely free from fraud or abuse. People have used crowdfunding, on a worldwide basis, to solicit and receive billions of dollars in capital for ideas and projects–all without any possibility of an investment return. I don’t think the SEC has any concept of how to think about this and why it is relevant to Title III crowdfunding. Here is an example anyone can relate to: the Girl Scouts sell a tremendous number of $2.00 boxes of cookies for $3.50 (and those cookies are coming your way right now). We do not need government regulators to protect us from the Girl Scouts.
Large numbers of people have established that, when they relate to a proposed project, they will back that project with money without any expectation of a financial return. There is a return on this “investment,” but it is related to the intangible benefit of knowing that you have helped something that you care about get done. I have often compared it to a modern-day barn raising. I predict that there is a much larger group of people who will invest in companies or projects through Title III crowdfunding than those who have already established that they will give money for rewards-based crowdfunding. The Girl Scouts have already proven it. When a Girl Scout comes to your door, they could ask you for a donation instead of asking you to buy a box of cookies. What Girl Scouts know is that a far larger number of us will overpay $1.50 for a box of cookies than those that will simply donate $1.50 without buying cookies. In both instances, the Girl Scouts are getting $1.50 to help their noble cause (note: this is just an example–I do not know what margin the Brownies have on their cookies). However, by selling the cookies, there is a good faith component that shows that the Girl Scouts are doing something and the buyer is getting something back. Here’s the point–it is not an entirely financial transaction. As a complete aside, the Boy Scouts are now falling in line and taking this to an extreme. You know what I mean if you bought the $15 bag of cheese popcorn that I bought this year.
I don’t need the government to direct the Girl Scouts to inform me that I could buy better cookies for less money (and I certainly do not need them to tell me the $15 popcorn is only worth a buck ninety-nine). I understand that. I want to buy the overpriced cookies and I want the particular Girl Scout to feel the satisfaction of having sold them to me (and so no, I do not buy them from the parent at the office that is doing the child’s work–just my own peeve).
Title III crowdfunding will share some similarities with buying Girl Scout cookies. Rather than overpaying for the crowdfunded investment, I will invest in social enterprises that have business models that I would like to see be successful. I will do that with a full understanding of the risks, the percentages of success or failure and the fact that I will most likely never see my investment back–let alone any financial return on my investment. I will do the same thing for businesses that are being started by people I want to support in starting their own business (and I hope that a few of them are some of those enterprising Girl Scout cookies salespeople)–even if I think their business is uninteresting or unlikely to be successful. The fact that the business operator is willing to share a return on my investment if it is successful will be enough for many people to back the project in a way they would not have done if they had no ownership interest at all. The investment component is the box of cookies. I don’t need the cookies. I was not looking for cookies. I will buy the cookies and support the cause.
I’m not talking about huge money here and the JOBS Act ensures that people cannot invest large sums under this exemption. What the SEC needs to understand is that these annual caps ARE THE GOVERNMENTAL PROTECTION. I think the annual caps on this investment category are actually far too small. I hope Mayor Bloomberg never tries to limit the number of cookie boxes I can buy from Girl Scouts.
I think I understand why this seems so hard for the SEC to gets its head around. As a former prosecutor, I understand that when you spend all of your professional time fighting criminals, you begin to think everyone is a criminal. Because you know infinitely more than the average person about the minority of people who willfully and routinely break the law, you see indicators of crime everywhere and you assume criminal behavior as the rule, rather than the exception.
To its credit, the SEC has now moved from an era where there was virtually no enforcement to an era of relevance. Unfortunately, they have also been unable or unwilling to go after the people who have recently orchestrated amongst the largest frauds in history. They have been feckless and willing to settle for embarrassing slaps on the wrist. Even where they have alleged fraud (and presumably believe they can proved it) they have failed to seek consequences commensurate with fraud. Apparently, at the highest levels they have been more concerned with their own personal “legacies” as opposed to doing what the law requires them to do.
What will the legacy be for Title III crowdfunding? Will it be that the SEC respected the law and provided for the fostering of a new source of investment capital that is directed to socially responsible businesses and Main Street businesses in a way that banks will not now do and Wall Street never cared about doing? Will it be that the SEC killed the exemption by swinging a sledge-hammer at a fly? If so, it would be another example of different rules for the “haves” and “have nots.” On Wall Street, you can actually commit monstrous fraud and steal client funds and the SEC will give you the equivalent of a shame on you note. For “too big to fail” banks, you can be bailed out and you can loan money only to those who do not need the loans. On Main Street–you’re on your own because we do not trust you enough to let you raise money from friends, family and supporters. If so, watch out Girl Scouts.