With preternatural sagacity, Yogi Berra once observed that “prediction is very hard, especially about the future”. Although I whole heartedly concur with Mr. Berra’s assessment of the difficulties that inhere in prognistication, I’ve nonetheless decided to make a prediction. My prediction is that after President Obama signs the Jumpstart Our Business Startups Act, there will be investor losses. I feel very safe in this prediction because there will be investor losses even if he should veto the JOBS Act.
Among other things, the JOBS Act will legalize “crowdfunding” pursuant to a new exemption (Section 4(6) of the Securities Act of 1933). Given the small amount of money that can be raised under this new exemption (the aggregate amount of securities sold to all investors within any 12-month period may not exceed $1 million), I expect that many of the issuers that use it will be start-ups just trying to get off the ground. Many, if not most, of these companies will fail and there will be investor losses. If the investors believe that there were material misstatements or omissions, the JOBS Act provides an express cause of action against the issuer. However, as I often remind my law students, suing the impecunious rarely pays. Thus, investors are likely to set their eyes on other potential sources of recovery. And the JOBS Act provides at least two.
First, the JOBS Act defines “issuer” to include any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officers, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security exempt under Section 4(6), and any person who offers or sells the security in that offering. Suing a director with deep pockets is likely to be far more remunerative than suing a defunct issuer. In this regard, I’m reminded of Sir Ernest Shackleton’s thoroughly pragmatic conclusion: “better a live donkey than a dead lion”. With insights like this, it’s no surprise that Shackleton and his men survived when other Antarctic explorers did not. A roughly analogous provision imposing liability on directors can be found in Section 25504 of the California Corporations Code. See “Court Rejects Control Requirement For Director Liability“.
Second, the requirement that an issuer use an intermediary, either a broker or a funding portal, may prove to be another source of potential recovery.