Tuesday, January 8, 2013

Why we need to rethink our fears of Crowdfunding.

Is fraud really the big issue in equity crowdfunding? According to this article, the SEC thinks so. As a result JOBS Act regulations allowing equity crowdfunding is being delayed by as much as a year.

Yet it exists – quite successfully, apparently – in Europe.

The problem is culture clash – regulators can’t imagine a crowd regulating itself.

They are not alone. Having sat on a panel with certain VCs I have found that some influential investors - including one facing a lawsuit for allegedly stealing an entrepreneur’s business plan – feel exactly the same way.

Yet none of these players have any idea how hard it is to get money out of the public when you don’t have the implied endorsement of a major brokerage house. So entrepreneurs have to go a long way to prove their bona fides, which is part of what makes them honest. Also, the amounts of money are laughably small – around $2,000. Besides which, people who invest in crowdfunding aren’t looking to make a killing so much as they are looking to be part of something they identify with. It’s a very different mentality. If on the other hand, they do want to make a killing they will be forced to diversify across deals, which is not a bad thing either.  

The SEC and the public should be more concerned about the return of implied endorsements that organizations like Fannie Mae or Moodies gave the mortgage industry that sank our entire economy. Or the $500 million of worthless stock Goldman Sachs for which sold the Dragon Systems (and now, arguably the basis of Siri). And let’s not get started on the amazing rip-off of the Mutual Fund and 401K system where you are being handcuffed on investing and hammered with fees.

Clearly, there will be problems with equity crowdfunding but far fewer and far less devastating than they think.

Unfortunately, these are bureaucrats and they probably don’t “get it” at the core. Also, there is regulators bias against the small and the relatively helpless. They tend to respect giants and lash out against the small. We all know that none of the scammers who undermined the economy ever went to jail. But as someone who sat on one the very few Federal juries for mortgage crime – I can tell you it was the little guy who “stole” $18,000 that got convicted while the bank that was clearly in cahoots and ripped off millions got to testify against him as if they had been victimized.

As much as I hate to see another bureaucracy emerge, Crowdfunding needs to be regulated by a new breed of or not at all for the same reason that Clayton Christensen wrote the “Innovator’s Dilemma”: you have to be willing to kill your own in order to innovate.

Bureaucrats don’t do that and so we need something that does.

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