Crowdfunding: positives and negatives

Crowdfunding is the hottest thing in entrepreneurship and finance. Earlier this year, Congress passed the Jumpstart Our Business Startups (JOBS) Act that legalized the ability to use crowdsourcing platforms to raise investor funds. The industry has already formed
the Crowdfunding Professional Association and the recent Crowdfunding Bootcamp drew enthusiastic response (see “Crowdfunding is the Real Deal – a Report from the Crowdfunding Bootcamp“). As that editorial said:

Crowdfund investing (as part of the JOBS Act) passed both houses of Congress with one of the largest bipartisan votes of the current congressional session. It represents not just Democrat and Republican ideals about how the security markets should operate in 2013 and beyond but the WILL OF THE AMERICAN PEOPLE to create jobs and support small business, entrepreneurs and innovation. If regulators chooses to delay or throttle the opportunity that Congress and the President signed into law, they are reversing what both houses of Congress and The President have passed. Crowdfund Investing is Web 3.0 where social networks meet community financing. As we learned at the event, it has been operating in similar but limited fashion in Australia and the UK for up to 7 years, and has been operating free from fraud.

On the other side is this piece in Forbes: “Crowdfunding: Potential Legal Disaster Waiting To Happen” that predicts “plenty of lawsuits” both for fraud and for failure:

Many crowdfunding investors will not be able to provide useful feedback since many of them will be seeking a “get rich quick” scheme; and they will be sadly disappointed when the business they invest in fails since many do within the first 5 years. For every Facebook, there are ten Friendsters.
Such business failures will inevitably result in litigation as people attempt to recoup whatever money they can from a failing crowdfunding entity.

Unfortunately, I think both sides are talking past each other. Crowdfunding represents a tremendous opportunity for funding entrepreneurs. But there will be failures and there will be fraud. Already there is an issue of so-called “blank check” companies attempting to use the law to circumvent standard regulations (see earlier posting). How the system copes with these issues will determine if crowdfunding lives up to its potential (it will never live up to its hype).
In an earlier posting, I made the point that the JOBS Act needs to be seen as a regulatory experiment. However, I don’t think either the supporters or critics see it that way. Too bad.

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