November 9, 2013
In these proposed rules, the SEC has done a commendable job of fleshing out the provision in the JOBS Act that requires crowdfunding portals to provide investor education materials. But as the SEC itself acknowledges, one aspect of crowdfunding that may still elude investors is how to exit their investments with the strongest possible returns:
"Uncertainty surrounding exit strategies for investors in crowdfunding offerings also might limit the benefits. In particular, it is unlikely that purchasers in crowdfunding transactions would be able to follow the typical path to liquidity that investors in other exempt offerings follow. . . . We anticipate that most businesses engaging in offerings in reliance on Section 4(a)(6) are unlikely to progress directly to an initial public offering on a national securities exchange given their small size, and investors might lack adequate strategies or opportunities to eventually divest their holdings." (Federal Register 78:214, p. 66518, column II, paragraph 1)
Given that the SEC anticipates this problem, it could help address it now by expanding its requirements for the investor education materials so that intermediaries must provide information about exit strategies. Before potential investors make the decision to fund a venture, they should be exposed to the process of divestment and to the specific challenges they are likely face in crowdfunding transactions. By altering these proposed rules to require that intermediary portals include information about exit strategies in their investor education materials, the SEC would help mitigate this drawback of crowdfunding.