Very few retail investors have the skill to pick a great deal from a mediocre deal. I know I don’t, and I’ve been representing real estate developers and entrepreneurs my whole career.
Taking a cue from the public stock market, one way to address the retail market is to create the equivalent of a mutual fund for Crowdfunding investments. You would create a limited liability company to act as the fund, raise money from investors using Crowdfunding, and the manager would select investments from Crowdfunding portals.
Great idea conceptually, but it doesn’t work legally:
- The LLC would, by definition, be an “investment company” under the Investment Company Act of 1940. As such, you would be prohibited from using Title III or Title IV to raise money for the fund.
- You could use Title II to raise money for the fund, but as an investment company the fund would be subject to extremely onerous and costly regulation, e., the same regulation that applies to mutual funds. To avoid the regulation, you would have to limit the fund to either (1) no more than 100 accredited investors, or (2) only investors with at least $5 million of investments. In either case, you defeat the purpose.
But there is another way! A licensed investment adviser could offer investment advice with respect to investments in Crowdfunding projects and, for that matter, make the investments on behalf of his or her retail customers, charging an annual fee based on the amount invested. The adviser would allow each retail investor to effectively create his or her own “mutual fund” of projects based on individual preferences.
Not only would the investment adviser make money, the availability of unbiased advice would draw retail investors into the space – a win for the industry.
To quote Pink Floyd, is there anybody out there?
Questions? Let me know.
Mark, I appreciate your articles. Always informative and insightful. This one especially hits home. I am a St. Louis, MO attorney practicing, in part, in private securities. I closely track all of the Reg A+ and Regulation Crowdfunding offers, and I am willing to share this information at no charge…for the time being (send an email to me at michael@SewellLaw.net to receive my weekly updates). As you suggest, I am taking the Series 65 exam for the purpose of being able to provide investment advice to retail crowdfunding investors. Subscribers to my free email updates will receive notice as to when I can provide this services. Thanks.
Mr. Roderick, this is a very interesting concept. My concern is that even under ideal circumstances, investing in startups is one of the more riskier endeavors. For a bunch of reasons, a portfolio of Crowdfunded startups (especially Title III) might be as risky as it gets. Would it be better to hold out until a secondary market develops in year or so, then Investment Advisers will have more information to ascertain which startups might be viable businesses with growth or buyout potential. Plus this provides more liquidity for RIA’s to make changes to the portfolio?
Interesting article as usual Mark, and it would be great if someone were able to pull this off. However, isn’t the problem much more complicated than whether or not the law allows it? o
For example, there have been some independent sites that have popped up that attempted to post positive and negative information on different investments. The problem they ran into is that certain crowdfunding sites have aggressively attempted to silence them with strong arm tactics such as cease-and-desist orders, etc.. Another tactic is to claim that the site is violating terms of service by republishing their information to others, or violating their privacy policy, etc.. So wouldn’t a company like you are suggesting run into exactly the same problem?
I appreciate your professional perspective and advice on investments in crowdfunding projects. This type of thing can be kind of confusing, but very helpful if you understand how it works. I will be looking into your tip about having a licensed investment adviser in order to succeed, thank you!