Far from the Maddening Crowd: Does the Jobs Act Provide Meaningful Redress to Small Investors for Securities Fraud in Connection with Crowdfunding Operations

Abstract

Title III of the Jumpstart Our Business Startups (“JOBS”) Act provides a “crowdfunding” exemption from securities registration for small issuers to publicly offer up to $1 million in equity securities during a twelve-month period. Issuers will conduct crowdfunding offerings through online social networks as a means of reaching a myriad of potential investors. Although Title III requires crowdfunding issuers to disclose information about the startup’s business and the securities being offered, many small investors will lack the financial sophistication to understand their investments and bear a higher risk of becoming victims of fraudulent offerings. In the likely event of issuer fraud, the economic incentives of crowd-funding make the class action vehicle a virtual prerequisite for small investors seeking to recoup their lost investments. The procedural hurdles erected by the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), however, would eliminate the efficacy of Title III’s private right of action and thus impede, if not entirely prevent, small defrauded crowd-funding investors from adequate redress. Yet class actions brought by small crowdfunding investors would not implicate the policy concerns that prompted the passage of the PSLRA. In order to create a truly viable crowdfunding exemption, Congress should carve out an exception to the PSLRA for class action lawsuits alleging fraud in connection with crowd-funding offerings.