A recent study, Swept Away by the Crowd? Crowdfunding, Venture Capital, and the Selection of Entrepreneurs, claims that investors on popular crowdfunding websites focus on many of the same qualities and indicia of potential success as venture capitalists.

According to an analysis published by the CrowdFund Intermediary Regulatory Advocates (cfira.org) this study "casts doubt [on the claims of critics] that crowdfund donors are an unsophisticated lot".

The study, led by Wharton School of Business Professor Ethan R. Mollick, reviewed 2,101 crowdfunded projects on Kickstarter. The study reviewed the history of success of a project, the influence of endorsements on a crowdfund project, the level of preparation demonstrated by an entrepreneur, quality, social networks, geographic outcomes and gender. The study concluded that crowdfunders act much like venture capitalists in making predictions on the success of a project, focusing on factors like the quality of the product, the resume of the team members and the likelihood of success.

According to Professor Mollick, "the signals of quality that are used by VCs to assess the viability of new ventures are also used by crowdfunders. This bolsters the validity of these signals as indicators of start-up potential, but also suggests that crowdfunding has the ability to distinguish quality potential projects from less promising ones."

This is an important conclusion Critics of the crowdfunding provisions of the 2012 JOBS Act claim that it is likely to increase levels of fraud, by permitting business promoters to pitch investment opportunities directly to non-accredited investors. If, as Professor Mollick's study suggests, crowdfund investors consider the same signals of quality as professional venture capitalists, the potential for fraud seems overblown.

My friend Dara Albright sums up the importance of Google's investment in Lending Club (prior post):

Although momentous for the consumer credit sector, many have been wondering how P2P's triumphs relate to securities-based crowdfunding. The fact is, because P2P lending is the precursor to securities-based crowdfunding, its achievements are not only dramatically impacting the emerging crowdfunding industry, they are helping shape it. Securities-based crowdfunding or "Peer-to-Business (P2B)" is simply the next iteration of P2P. However, instead of peers providing personal loans to its peers, securities-based crowdfunding will allow peers to invest in the businesses of its fellow peers in exchange for equity or debt. By demonstrating that people are more efficient at financing each other through the use of social media than with conventional banking intermediaries, P2P has effectively validated the "crowdfinance" model for the entire industry, even compelling the financial establishment to enter the fray.

Internet giant Google (NASDAQ: GOOG) last week announced that it was buying a stake in peer-to-peer financing platform Lending Club.

The transaction, which effectively values Lending Club at around $1.55 billion, validates much of the thinking around crowdfunding.

The central premise of crowdfunding is that a large group of people, with access to transparent information and the ability to communicate in real time, will make efficient decisions with their own money. It was for this reason that Congress amended the Securities Act of 1933 in the 2012 JOBS Act to open the doors to crowdfunding in the U.S. (Prior post).

Lending Club is not a crowdfunding portal, as envisioned by the JOBS Act. Rather, Lending Club collects loan applications from a large number of borrowers. Members of the Lending Club website have the ability to fund loans to those applicants. The loans themselves are made via Lending Club, which bundles the loans into separate securities which are sold to the Lending Club members. As a result, while members decision which borrowers to whom they will loan money, the loan is made indirectly through a Lending Club subsidiary.

In contrast, the JOBS Act created a legal entity called a "crowdfunding portal" which is supposed to facilitate direct investments in securities from individual companies (or "issuers") and individual investors. Although the Lending Club relies on the crowdfunding theory of marketplace efficiency, its legal structure is different from that contemplated by the JOBS Act.

The importance of Google's investment is that it validates the theory behind crowdfunding. Google chose to invest $125 million in Lending Club because it believes that technology is making it possible to derive value from the efficient decisions that crowds can make. Congress chose to unlock that potential to investors as well through the JOBS Act. the SEC, however, has failed to do its job by issuing the regulations that were required by the Act to make securities-based crowdfunding legal.

Bloomberg is reporting that SEC Commission Chair Mary Jo White is pushing to have the SEC's proposed rule, lifting the ban on general solicitation in Regulation D offerings, adopted in its present state.

The ban on general solicitation is the rule, dating from the Securities Act of 1933, that prevents public advertising relating to most private securities offerings. Lifting the ban was an important element of the JOBS Act and the JOBS Act required the SEC to implement regulations lifting the ban. The SEC's staff drafted a proposed rule in late 2012 but some Democratic members of the Commission (such as Luis Aguilar) opposed its adoption, claiming that it did not do enough to protect investors.

While lifting the ban would not immediately allow interstate crowdfunded offerings to commence, lifting the ban is a prerequisite. This is so because most crowdfunding portals would rely on their general availability to the public to draw sufficient traffic to make their crowdfunded offerings possible. (See prior post on crowdfunding).

The CrowdFund Intermediary Regulatory Association has published an open letter to the House Committee on Financial Services, Subcommittee on Oversight and Investigations, in preparation for that Committee's hearing tomorrow on the SEC's delay in adopting the crowdfunding regulations required by the JOBS Act.

CFIRA takes pains to distinguish the efforts undertaken by SEC staffers to examine the issuer and diligently meet with stakeholders from the delay caused by the Commission itself. The group writes:

"[I]t is important to understand the hard work and dedication that has been shown by the staff in creating draft rules for the Commission. The staff has been proactive in meeting with all members of the industry each time we have requested their presence, and has been extremely proactive in reaching out to us to discuss many aspects of the regulations surrounding the JOBS Act. In fact, we believe that the staff has had draft rules before the Commissioners since November 2012. As you seek information from the SEC during your hearing on April 17, 2013, we encourage you to place your frustration and concern with the party most able to respond, and that party is the Commission, rather than the staff."

Meanwhile, if you're interested in hearing more about the practical implications of crowdfunding, please join me at the Ritz Group's "Shark Attack" crowdfunding symposium this Thursday, April 18, 2013 at the City Club in Buckhead (Atlanta) where I'll be joined by Maurice Lopes (Crowdfund Professional Association) and Candace Klein (SoMoLend and Bad Girl Ventures) in an interactive webcast event on the topic hosted by Dara Albright (NowStreet).

After celebrating the first anniversary of the passage of the JOBS Act, the SEC still has not adopted regulations to implement the law as required. (Background post).

Congress is taking notice, as the House Small Business Subcommittee on Investigations, Oversight and Regulations last week held hearings on the SEC's delay.

In testimony before the Subcommittee, SEC staffers explained the work that had been done so far to implement the JOBS Act but were curiously silent as to the reason why the SEC had missed the deadline for the adoption of rules to implement the crowdfunding provisions of the law.

In his opening statement, Chairman David Schweikert (R - Az.) noted that these regulations were "long past due." He said that "the longer we wait for action by the regulators, the more our engines of economic growth will continue to simply tread water, or worse yet starve, for lack of opportunity."

At least one witness at the hearing put the blame for the delay squarely at the feet of the SEC. Georgetown University finance Prof. James J. Angel testified that "The commission has shown a pattern of antipathy toward the idea of crowdfunding from the beginning and is in great danger of killing the idea through regulatory delay and over- regulation."

In addition, on Wednesday, April 17th the House Committee on Financial Services will be holding a hearing provocatively entitled, "Examining the SEC's Failure to Implement Title II of the JOBS Act and its Impact on Economic Growth."

In the mean time, Forbes blogger David Drake in a recent post forecast the possibility that Italy will overtake the U.S. in equity-based crowdfunding. (Apparently regulators in Italy have made more progress than their counterparts in the U.S. when it comes to implementing crowdfunding).

It goes to show how far the concerns of U.S. lawmakers and regulators have shifted when securities laws in Italy are more friendly to business than those in the U.S.

What if Congress passed a law but no one listened?

That seems to be what happened with the JOBS Act passed by Congress and signed by the President last year.

The "Jumpstart Our Business Startups Act" (H.R. 3606) was passed by the House of Representatives in March 2012 with an overwhelming vote of 380 to 41. The measure had previously passed the Senate with a bipartisan majority.

President Obama signed the Act a few days later calling it a "game-changer" and that the measure "represents exactly the kind of bipartisan action we should be taking in Washington to help our economy."

The Act amended the Securities Act of 1933 in several respects, including by creating a new exemption from registration to allow small business to raise funds via sales of securities directly to the public through a "crowd-fund portal". This new entity - the crowd-fund portal - was to be defined by regulations promulgated by the SEC. According to the President, "Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors -- namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in." (For a crowdfunding backgrounder, see Dara Albright's site).

Among other changes to securities laws, the Act opened the door for private companies to publicly advertise the availability of investment opportunities in their securities (a practice known as "solicitation" and previously banned under the Securities Act of 1933). Removing the ban on solicitation was intended to make it easier for private companies to locate potential "accredited investors" who would be qualified to invest in exempt offerings of their securities under Regulation D.

Knowing that it would be necessary for the SEC to promulgate regulations to implement these changes, Congress specifically obligated the SEC to adopt rules promptly. In Section 201 of the Act Congress required the SEC to "revise its rules" with respect to the ban on Regulation D solicitations "not later than 90 days after the enactment of this Act."

Also, in Section 301 of the Act, Congress required the SEC "not later than 180 days after the enactment of this Act" to issue such rules as may be necessary to carry out the amendments contained in Section 301 of the Act.

Despite these clear instructions, nearly a year after passage of the law, the SEC has failed to implement these regulations. When pushed for an explanation, SEC appointees have suggested that they disagree with the law's aims and fear that it will harm their "legacy." (WSJ; Wired).

Does it bother anyone else that the SEC believes it is entitled to pick and choose which laws it has to follow and that it does so on the basis of the perceived "legacy" that its political appointees believe they have?

The Georgia Supreme Court yesterday in Atlanta Oculoplastic Surgery v. Nestlehutt struck down as unconstitutional Georgia's statutory limitation on non-economic damages in medical malpractice actions.

Georgia had adopted a cap of $350,000 on non-economic damages in medical malpractice cases as part of its 2005 tort reform statute. (Prior post). The cap (codified at O.C.G.A. 51-13-1) caps non-economic damages at $350,000 in any action for medical malpractice, including an action for wrongful death.

The Georgia Supreme Court upheld the ruling of the trial court, that the statute was unconstitutional in light of Georgia's constitutional provision that "[t]he right to a trial by jury shall remain inviolate." (Ga. Const. of 1983, Art. I., Sec. 1, Par XI(a)).

The Court's opinion, which was unanimous, looked to prior Georgia cases intepreting Georgia's unique "right to trial" provision, finding that they prohibited statutory limitations on the right to trial in cases where the common law had permitted a plaintiff to have a trial. Citing Blackstone and other ancient authorities, the Court found that a cause of action for medical malpractice was well-established prior to the adoption of Georgia's Constitution and was, therefore, a right that could not be limited by statute.

In a later post I plan to contrast the reasoning behind this opinion with the Court's decision on loser-pays just last week.

The enforceability of the offer of judgment rule in Georgia is now established as the Georgia Supreme Court in Smith v. Baptiste made it clear in its ruling on Monday that the 2005 offer of judgment rule was permitted under Georgia's Constitution. (Prior post).

To paraphrase Grateful Dead front man Jerry Garcia, however, "what a long, strange trip it was."

In a twin blow to trial lawyers yesterday the Georgia Supreme Court upheld two provisions of the state's 2005 tort reform statute. (Prior post.)

In Smith v. Baptiste the court upheld an offer of judgment rule (codified at O.C.G.A. 9-11-68) that allows a defendant in a tort case to 'shift' its attorneys fees to the plaintiff if the plaintiff refuses to accept an offer of settlement and ultimately fails to recover more than the amount offered. (Prior post on Georgia offer of judgment rule). The offer of judgment rule was adopted as part of Georgia's comprehensive tort reform legislation in 2005.

In Gliemmo v. Cousineau the court upheld the Georgia statute's limitation of liability for emergency room doctors which limits liability only to claims resulting from "gross negligence."

Groups affiliated with trial lawyers had attacked both elements of the tort reform statute on constitutional grounds. I hope to supplement this post with a longer analysis of the offer of judgment rule case shortly.