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.