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The Deal: States Greet Crowdfunding With Hostility

Even under the new rules, private securities offerings under Rule 506 of the Securities Act will still mostly be limited to accredited investors. The new general solicitation rule also established a list of steps that private placement issuers can take to verify that investors are accredited.

The new unit of the Massachusetts Securities Division will consist of information technology staff and attorneys. It will be called I-CROWD, which stands for Internet Crowdfunding and Offerings Watch Department.

The I-CROWD unit will assess the impact of changes in the laws and rules that apply to unregistered offerings, according to Galvin's office. It also will gather data about the types and quantity of public advertising used for unregistered securities. In addition, the unit will track how issuers use the new rules allowing general solicitation and advertising, and compile information on how issuers verify the accredited status of their investors. The unit will monitor Web portals in Massachusetts with the intention of detecting fraud early and referring cases for enforcement action.

While "some states are doing everything they can to kill crowdfunding," others like Georgia, Kansas and North Carolina may be doing a better job of regulating crowdfunding than even envisioned by the JOBS Act, Sidman said.

"Georgia has a much better, smart and less onerous platform for regulating crowdfunding," he said. "It's a model much closer to the original [Rep. Patrick] McHenry crowdfunding proposal in the JOBS Act before it was watered down with so-called investor protections.

"I've been in this business a long time and I've lost some money and made some money and I've yet to see one instance where fraud was an issue," Sidman said. "I've never seen the fraud everybody talks about. When you're limiting it to the 1% who qualify as accredited investors, you're limiting it to people sophisticated enough to root out fraud."

While Sidman is skeptical of fraud, he is also skeptical that crowdfunding will ever be a source of real wealth creation for ordinary Americans.

"I don't view crowdfunding as a panacea for anything," he said. "Joe Q. Public doesn't have the experience to do this in a meaningful way."
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