The summary below was written by the Congressional Research Service, a nonpartisan division of the Library of Congress.
Fix Crowdfunding Act
This bill amends the Securities Act of 1933 (Act) to increase from $1 million to $5 million the aggregate amount of securities sold to all investors by an issuer that qualify for the crowdfunding exemption from certain prohibitions relating to interstate commerce and the mails.
The bill amends the Jumpstart Our Business Startups Act (JOBS Act) to declare that a crowdfunding portal shall have a reasonable basis for disqualifying issuers from offering securities through the portal if through a background check it has found that an issuer has made an untrue statement of a material fact, omitted to state a material fact necessary to avoid making misleading statements, or engaged in fraud or deceit. No intermediary (crowdfunding portal) shall be liable for an issuer's material misstatements and omissions unless, in connection with the offer or sale of a security, it knowingly made or omitted such statements or engaged in fraud or deceit.
The bill amends the Securities Exchange Act of 1934 to exempt crowdfunding securities transactions from its registration requirements.
The Investment Company Act of 1940 is amended to exempt from the definition of investment company, and so exclude from coverage by that Act, any issuer that, for the purpose of making a crowdfunding offering, holds the securities of not more than one issuer eligible to offer securities (a single-purpose fund).
The bill allows single-purpose funds to sell and offer for sale securities according to crowdfunding requirements, and considers them venture capital funds.
The Act is further amended to permit an issuer, before commencing a crowdfunding offering, to solicit non-binding indications of interest from potential investors in the prospective offering if:
no investor funds are accepted by the issuer, and any material change in the information furnished during the actual offering from the information furnished during the solicitation of interest is highlighted to potential investors in the information filed with the Securities and Exchange Commission. No enforcement action may be brought before May 16, 2021, against crowdfunding portals established under the JOBS Act.
We note with interest a recent study from the University at Buffalo School of Management that shows "high quality photos and video, previous crowdfunding success and positive comments from backers are the keys to a successful campaign."
According to news reports, the University at Buffalo School of Management study "found that by receiving these signals, potential investors..gain valuable information that motivates them to participate and increases the likelihood of a project achieving its funding goal."
One part of the analysis we found in error, however. One of the authors of the study was quoted as saying that
"These sources are important because backers of crowdfunded projects have less access to information than typical private equity investors..private equity investors follow a stringent due diligence process to assess the quality of a startup, while crowdfunding backers rely more on the information on the campaign's webpage."
This shows a lack of understanding about crowdfunding and private equity firms, who lose 80% of the funds they invest, something that would not occur if they really followed "stringent due diligence process(es) to assess the quality of a startup."