Crowdfunding Law

Let's Get Crowdfunding Right

Month: April, 2012

Crowdfunding as the New Wild West?

Maybe the Final Frontier…

The Apex Law Group recently blogged a thoughtful post analogizing the opportunity and risk of investment crowdfunding with the risk and potential of the Wild, Wild West.  It is a useful analogy if, as they did, you leave behind the loaded nature of the term “Wild West”.  Hollywood probably created the bias that the Wild West was largely lawless and fraught with danger and schemers.  As Apex points out, there were many, many long-term benefits and assets created by genuine people opening that new frontier.  Crowdfunding will be similar.  I’d probably only take issue with the statement that the western frontier “meant suffering for most.”  I imagine it was a rugged life full of hard and thankless work–somewhat like life as a startup founder, but “suffering” may be too strong.

In any event, we do not have to speculate about the suffering of the crowdfunding frontier.  We have hundreds of millions of dollars of experience to draw upon in the industry and schemers and snake oil salesmen have yet to have any impact.  I might equate it more to the Final Frontier: space exploration has produced tremendous innovations and tremendous wastes of money alike.  However, we have not been attacked by aliens yet.

Will Advancement into Securities Sales Bring Out the Outlaws?

The fact that the JOBS Act now extends the crowdfunding industry in the U.S. to investment-based crowdfunding does not mean that the bottom-feeders that lurk around securities transactions will suddenly jump on the venue.  In fact, if I was an enterprising criminal, I would vastly prefer the current donation-based venues.  After all, the JOBS Act will require independent accounting reviews or audits (depending on the amount raised) and filings with the SEC.  Kickstarter does not so much as require an annual thank you note.  Again, donation-based crowdfunding is a reality now so you can leave your crystal ball at home.  At Sprigster, we decided to limit our Boost a Hero program to FTC registered franchise business opportunities.  That way, the franchisor stays in the business and it provides additional protections that the project is real.  But I digress, why would we anticipate that people will be wholesale defrauded under the JOBS Act when it would be much easier, and free of reporting the SEC, to simply make up a compelling case for funding under a donation-platform and then run off with the money?  Existing donation-based projects have exceeded the $1,000,000 maximum under the JOBS Act so it won’t be an increase in available money that will cause a rush to crowdfunding under the JOBS Act.

Some People in the Wild West Started in Missouri

Snake oils salesmen are everywhere these days and seem to proliferate on the Internet, church congregations and, well, Wall Street.  We have become skeptical society for good reason but even in the Wild West a few people immigrated from Missouri and their “show me” style presumably did not lead them to be big consumers of snake oil.  After the internet, we are all from Missouri.  You don’t respond to emails from Nigeria, you do not volunteer personal information after being solicited on the internet and you are probably not going to buy an investment from someone you don’t know operating a business or technology you don’t understand.  They never had Google, LinkedIn or Twitter in the Wild West.  Chances are that if someone has a checkered past, a criminal record or just a horrible record of building businesses, you are going to find out about it.

If fraud is going to be a significant issue with crowdfunding, the JOBS Act does nothing to make that more likely.  That’s certainly not to say that all investment opportunities will be good ones but it has nothing to do with fraud–it is simply the math on the likelihood that any particular new business will succeed.  The SEC will make sure that people are informed of that fact.  Crowdfunding snake oil?  We constructive Missourians are not quite so simple.

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Responding to More Useless Drivel Disparaging Crowdfunding Law

Well, here we go again.  Just when you thought that those commentators without a single novel idea had been embarrassed into going back to their ivory towers to find a clue, along comes this piece from John Wasik further criticizing the new crowdfunding law.  Maybe John missed Dara Albright’s recent blog where she addressed Ross Sorkin’s equally dense criticisms of the JOBS Act in the NYT.  I guess not.  Now comes Wasik to make the bold prediction that fraud and misrepresentations will be made by some unscrupulous characters in connection with securities offerings.  I will make an equally profound assessment and predict that a natural disaster will occur somewhere in the remainder of 2012.

Whereas Sorkin uses actual SEC registered abuses as evidence that we need the very same SEC registration process that the crowdfunding law modifies, Wasik seems to suggest that the crowdfunding exemption is a crazy example of “deregulation” because the very regulation established under the crowdfunding law involves regulators (the SEC) who do not have the resources to regulate.  I’m not kidding.  Go back and read it.  Maybe Wasik should be working on SEC budgetary issues rather than weighing in on crowdfunding.

Similar to Sorkin’s “the existence of the broken system proves we need the broken system” argument, Wasik believes we should continue to require start up companies to make costly, duplicative and time consuming state filings with state regulators (his theoretical “pack of watchdogs”) in order to preserve the proper amount of regulatory scrutiny.  Well, God knows these filings have been soooo successful in rooting out examples of fraud in the past.  I mean just think about….wait…I can’t think of a single instance where this “pack of watchdogs” has rooted out examples of the fraud Wasik contemplates.  Wasik wields his pen to prove that the states are angered that these duplicative filings will no longer be required.  Naturally, their concern is an issue of “investor protection” and has absolutely nothing to do with the fact that they will not be able to collect their filing fees on crowdfunding transactions (“Blue Sky” should be renamed “Green Sky”). Please.

Back to reality.  Financial “experts” please put away your papery straw men.  Whether through a crowdfunding portal or the New York Stock Exchange, if:

1. You do not know the management team of the company or their history;

2. You do not understand the business model, the technology and the competitive landscape; and

3. You are investing money that you cannot afford to lose.

DO NOT MAKE AN INVESTMENT.  Crowdfunding has nothing to do with this simple logic.

If you are counting on the SEC, state regulators or a “financial expert” to have done this work for you or to have ferreted out untruths, please wake up and read the newspaper.  History should tell you that this is not being done, has never been done and it will not be done in the future no matter how many regulators you throw at it and no matter how pollyannaish your average NYT or Forbes commentator might be.  The reality is that members of the “crowd” figured out the Madoff scam and most often have been the whistleblowers that have exposed fraud.  Even when tipped off, the regulators are mostly ineffective at halting it.  As I have said before, given the choice of regulators or the crowd, I’ll take my chances with the crowd. In the interim, let’s not let clueless commentators take away from the fact that Congress and the President just took a huge step in updating laws that only hinder the ability of good companies to get funding and regular people to benefit from that.

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