Further Thoughts on JOBS Act and Investor Fraud

Over the New Year, I saw the new Leonardo DiCaprio/Martin Scorsese film, “The Wolf of Wall Street,” which told the apparently mostly-not-embellished true story of boiler room scammer Jordan Belfort.  In addition to setting a record for use of the f-word in a film, this movie was the most relevant to what I do for a living since “The Social Network” improbably addressed the issue of dilution of startup founders.

JOBS Acts and Crowdfunding

Ronald Rubin, a former SEC attorney who investigated Belfort, provided some more detail on the scam in a recent Wall Street Journal piece.  After detailing the methods, which involved IPOs and pump-and-dumps of dodgy companies, Rubin concludes that while this particular scam couldn’t be pulled off today given the regulators’ improved technological ability to monitor market activity, con artists are endlessly inventive and often come up with new ways to fleece investors before the regulators eventually catch up.

This got me thinking, again, about the ongoing changes to the securities laws imposed by the JOBS Act and the concerns expressed by commentators that the steps being taken to ease capital raising by small companies will have the unintended consequence of facilitating fraud.  I noted in my post on the SEC’s recent crowdfunding proposal that frauds have been perpetrated long before newfangled methods of offering securities like crowdfunding have become available, and in fact by requiring crowdfunding to be done via SEC-monitored online portals (as opposed to, say, Section 4(2) non-Regulation D private placements, which never get on the SEC’s radar screen), fraud would be easier to detect.  Belfort’s crimes were committed using mechanisms dating back to the creation of the SEC:  sales of securities registered under the Securities Act of 1933 and after-market trading regulated by the Securities Exchange Act of 1934.

My point is that while preventing and prosecuting investor fraud should be a huge priority for securities regulators, the effort spearheaded by the JOBS Act to make capital raising easier for smaller companies, and to democratize the investor base and let middle class Americans have the ability to help fund new ventures, should not be resisted on the ground that it will facilitate fraud.  The way to combat fraud is directly, via governmental and private plaintiff enforcement, not by making it harder for everyone including the law-abiding to use technology to facilitate the matching of companies with investors.