The SEC meets It’s a Wonderful Life

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When I first learned of the crowdfunding industry, one question above all others itched at the back of my mind: When and why was crowdfunding illegal? It was beyond me how such an effective wealth and community building tool was ever seen as threatening to the American economy.

The reason, I discovered, was a lack of regulation in early community funded projects. And, unbeknownst to many, this lack of regulated investment opportunities was a primary culprit for the worst recession in the history of the United States. (You might be familiar with a minor economic hiccup called The Great Depression.)

In the early 1920s, the U.S. economy was thriving, thanks to the economic surge resulting from World War I. More than 200 million large and small shareholders invested in the stock market, hoping to take advantage of the country’s post-war fortune. However, because there were no regulatory securities laws in effect, and many of the offered investments were either unsupported or fraudulent, more than half of the country’s purchased stocks proved worthless, causing the nation’s shareholders to lose over $25 billion.

So what role do bad investments play in crowdfunding? And how could they possibly have a connection to Christmas?

In 1947, director Frank Capra debuted what would eventually become a holiday classic: It’s a Wonderful Life. The film follows the emotional journey of small town bank owner George Bailey (Jimmy Stewart), who dreams big but never quite makes it beyond the city limits of his hometown. Disillusioned by a series of Christmastime failures, George questions the value of his life and considers ending it all. He is saved by an angel who offers him the opportunity to see what the world would be like if he had never been born, and George Bailey realizes that he truly has an important and “wonderful life.”

So, what does this story have to do with crowdfunding and the Great Depression?

Well, the primary reason for George Bailey’s distress is financial. In a chain of events simulating the Great Stock Market Crash of 1929, George’s company loses all of its capital. George provides a temporary solution to the financial crisis by pulling money from his honeymoon fund to issue loans to the community.

But in the unscripted reality of the 1930s, there was no miraculous honeymoon money to loan to the general public, and there were no angels. A change had to be made at the highest financial level to make investing safe again.

That necessary change came in the form of The Securities Act of 1933 and The Exchange Act of 1934, both of which contributed to the foundation of the Securities and Exchange Commission in 1934. These legislative movements mandated honesty and transparency when advertising a deal and limited many investment opportunities to individuals who could take a financial hit, individuals we know today as “accredited investors.”

However, in 2012, Congress passed and the president approved the Jumpstart Our Business Startups (JOBS) Act to encourage the creation and funding of small businesses in America. In amendment of the Securities and Exchange acts, the JOBS Act allows for citizens around the country—and around the world—to invest in businesses and products over the internet, as long as the goods and services are offered in accordance with regulations set by the SEC in the fine print of the JOBS Act.

For the founders of Crowdfunding portals like PeerRealty, OurCrowd and Angel List, the 2013 ratification of Title II of the JOBS Act was like having Christmas come early. For the first time in nearly a century, it was legal to publically raise funds for private projects. And almost immediately, the ideas started to flow.

In the past year, peer-to-peer funding paid for the development of personal 3D printers, video games and theatrical works, as well as science museums, sustainable lightbulbs and compostable water purifiers. The online market, and the power of the middle-market investor, seemed to triple overnight.

However, only a select few individuals could legally invest in said projects, because Title II specifies that only accredited investors (individuals with a net worth of at least $1million) can invest in generally solicited projects and companies, which excludes about 98% of the US population from sharing in these deals. In early December, the SEC disappointed crowdfunders across the nation as it announced a nearly year-long delay for the final rulings on Title III of the JOBS Act, which would legalize investments made by non-accredited investors.

In other words, this season the SEC has been a regular Scrooge; denying the everyday person the chance to invest in wealth building deals. While the SEC sits on its hands, people can spend all the money they want on Kickstarter, earning them trinkets and promises, but they can’t invest in those same businesses to earn a return. It’s a reality that feels like a massive lump of coal lodged in our holiday stocking.

So, how do we resolve this issue and bring a little hope back to the season?

We write to Congress, publish articles and work to convince the SEC that people can protect themselves as long as portals are transparent; that we, the American people have learned from our past mistakes, and, if given the chance to invest, we will not become the George Baileys of the world who lose everything, but the George Baileys of the world who lead wonderful and rich lives.