SEC’s Plan to Loosen Crowdfunding Restrictions Is a Bad Idea
Written by Aron Szapiro and Jasmin Sethi for SCA client, Morningstar.
The SEC has recently proposed loosening the restrictions to allow ordinary people greater access to crowdfunding opportunities, as part of a broader package aimed at expanding access to private investment opportunities. While the recent proposal contains some provisions we support, it is way too permissive regarding crowdfunding. Additionally, a pandemic is no time to be experimenting with loosening investor protections. Crowdfunding is a particularly high risk investment. In this moment, when emotions are high, economic uncertainty is significant, and the public markets are volatile, expanding crowdfunding could lead to panicked ordinary people putting too much of their hard-earned savings in questionable crowdfunding schemes, particularly if local businesses tug on their heartstrings with their appeals.
The Proposed Rule Would Make It Easy to Invest a Significant Part of One’s Net Worth Into One Company
The table below shows how the SEC’s proposal would impact different groups of investors.
As the table shows, an individual in Group A would be able to invest twice as much under the SEC’s proposal than under current regulations. An individual in Group B would be able to invest over 33% more under the SEC’s proposal than under current regulations. We note that net worth for most individuals likely represents the value of a 401(k) balance minus nonmortgage debt, such as credit card debt. We could be supportive of loosening restrictions if net worth accounted for whether the individual had reasonable retirement security. Net worth only excludes the primary residence, which does not account for the financial well-being of renters and falsely assumes that a house is more necessary than a diversified retirement portfolio in determining an individual’s ability to take on investment risk.
