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What kind of regulations need to be in place to protect founders from being sued if their crowdfunded startup fails?

Chris Barsness,

startup, finance, law, and tech nerd

I would just add that if you are talking about regulations by the government, the law makes it clear the government wants founders to worry about being liable, so they aren’t going to do anything to protect founders.  Not only was there already potential liability to the issuer in situations where they employ what are commonly known as “finders” who try to help raise money for a company for a fee without being registered broker/dealers, the new legislation made it even more clear their intent to impose liability on issuers (and officers, directors, etc) in the crowdfunding context where the funding portal or broker is registered with the SEC.

If you are referring to regulations in terms of what the company or founders can do to protect themselves, they can still try to protect using indemnification agreements and D&O liability insurance policies like companies already use to protect themselves (although they may start adding exclusions from coverage for these situations).  The problem is that this is such a new area for potential abuse and even once the SEC rules come out, there can still be grey areas and case law that could alter how the JOBS Act is interpreted.  As mentioned above, crowdfunded companies probably will have difficulty recruiting officers and directors, as well as sophisticated investors until this area of law gets more settled.

This is one of the problems with brand new laws or regulations, they haven’t been interpreted over time so that people know exactly what they can and can’t do.  You could follow the letter of the law, only to have the SEC or a jury say that you crossed the line.  Anyone who ventures into this needs to be extremely cautious in the company’s dealings, doing due diligence on any funding portal and keeping strict tabs on that funding portal.  There can be strategies to implement more protections in this situation, but only over time will we know the real liabilities.

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