Associations Grapple With Startup-Funding Law

While crowdfunding associations have come out in favor of the JOBS Act, other associations worry about the startup-funding law's ramifications for investors.

Should investing in a startup be so easy that anyone can do it?

While some crowdfunding organizations have cropped up to support a budding industry, many associations are concerned about the ramifications of the JOBS (Jumpstart Our Business Startups) Act, passed earlier this year to simplify things for firms looking for investments.

The law includes a rule making it easier for groups to advertise to potential investors in their for-profit businesses, which the Consumer Federation of America and the North American Securities Administrators Association (NASAA) warn could prove dangerous to investors.

Regulations on private investments have been eased over the years, with an exemption in securities law, Rule 506 of Regulation D, allowing investors to raise money for their companies without going through numerous regulatory hoops. But allowing startups to advertise such investments is bad news, the associations say.

“Lifting the advertising ban on these highly risky, illiquid offerings, without requiring appropriate safeguards, will create chaos in the market and expose investors to an even greater risk of fraud and abuse,” said NASAA head Heath Abshure in a statement. “Without adequate investor protections to safeguard the integrity of the private placement marketplace, investors should and will flee from the market, leaving small businesses without an important source of capital.”

As The Verge points out, Rule 506 was a hit when it first took effect in 1982 and played a large role in the rise of startup culture. But it has been abused in the past, and could be abused further by companies taking advantage of individuals who may not understand the nuances of investing.

Other groups, including Americans for Financial Reform, AARP, and the AFL-CIO, have also come out against the regulatory changes in the JOBS Act.

Does the JOBS Act endanger investors or enable crowdsourcing? Let us know what you think in the comments.

(TMG archive photo)

Ernie Smith

By Ernie Smith

Ernie Smith is a former senior editor for Associations Now. MORE

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