The following is a guest post from Dealflow’s Steven Dresner.
Since launching the Series D blog, I’ve been covering the topic of crowdfunding with what I think is a healthy dose of cautious optimism. Nobody can accuse me of not wanting crowd-based equity funding to work in a big way. Heck, in 2013 I was first to publish a book on the subject with Wiley/Bloomberg Press, “Crowdfunding: A Guide to Raising Capital on the Internet” and, I was first to produce not one, but two, trade shows in 2012 under the brand “The Crowdfunding Conference.”
Even though I’m a supporter of the crowdfunding movement, I’ve been balanced in my critique of Regulation CF, frequently referring to it as “Regulation Red Tape” and expressing concern over the general workability of the final rules. I’ve also written about how if crowdfunding is going to work in a meaningful way, investors will need comfort that issuers and funding platforms won’t abscond with their money.
With equity crowdfunding now in action, I thought I’d revisit these two important themes.
Everyone knows that the now-live SEC rules are just a start. And for people like me, who’ve been in the flow of news for over three years, all you need to do is check your mailbox to get confirmation that crowdfunding is all of a sudden, very real. I must’ve received a dozen emails this week from friends asking if I thought they should raise capital online. I’m a Peter Lynch type of guy so for me, that’s all the proof I need that capital markets are moving onto the Internet in a mainstream way.
Given the complexity of Reg CF, and more specifically, the onerous administrative, accounting, and legal burdens, there’s surely going to be a re-writing and another re-writing of the rules. As an industry that knows we’ll have to work through these changes, we should be unified in refuting the assertion made by naysayers that crowdfunding will be “bad” for unsophisticated investors who participate in securities offerings of startup companies.
Crowdfunding shouldn’t be debated as being some kind of new, risky asset class for unsophisticated investors. At this very early stage, crowdfunding should be viewed as simply a way to make investments available to more people. Whether or not the broader public will invest in private placements of startup companies is missing the point.
Pretty much every product can now be bought and sold online. Anyone can invest in stocks online, research those stocks online and make their own decisions as to whether or not to buy stocks online. Plenty of stocks you can buy through an online broker lack disclosure and are risky investments. But as stocks have moved online, consumers have been the beneficiaries of more choices, lower transaction costs, better pricing, and generally more efficient markets.
With the new SEC rules under the JOBS Act, first to allow general solicitation under Title II and now to allow crowdfunding, all that’s happening is you’re seeing a new way to make investments.
I would agree that for most people, investing in startups is a dicey proposition. But it can’t be disputed when you consider the 80-year old securities regime that these rules are still extremely outdated and didn’t contemplate the way securities will be sold in the modern age.
I think it’s useful to view crowdfunding as simply moving the process of making private investments onto the Internet so that people can invest online if they choose to do so. Whether those investments remain in the domain of friends-and-family supporters or whether they become widely distributed and expose many people to great risk isn’t the point.
The point is that people should get to decide where they will invest, and what they will buy and sell. And they should have the opportunity to do it online just like they can in virtually any other market – provided of course, that there’s proper disclosure and compliance with the rules as they develop.
With this in mind, I think one major area that the rules need refinement is in creating a framework that will provide investors’ comfort that issuers and funding platforms won’t abscond with their money. In a prior blog I suggested what might’ve sounded like a half-baked idea. But upon reflection, I don’t think it’s so nutty.
One way to create comfort for investors would be through a program that resembles SIPC and forces registered funding portals to participate by paying into the program according to a percentage of their net revenues. SIPC, or the Securities Investor Protection Corporation is a non-profit, non-government membership group funded by FINRA broker-dealers. All brokerage firms that sell stocks and bonds are required to be members of SIPC.
It seems to me that a similar framework could be developed by the crowdfunding industry to reimburse investors who were victims of fraud and have no recourse against a platform if that platform becomes insolvent. This might be necessary since the SEC did away with the proposed bond that the portals were going to have to post.
In a prior blog I suggested calling this SIPC-like program the “Crowdfunding Remuneration and Protection Fund,” or “CRAP Fund” for short. (Mike gets credit for this one.) Yeah it sounds nutty… but is it?
I’ve been reading a lot of commentary which jibes with my view that the SEC’s rules will need refinement. But for now, I feel pretty good about things and I’m certain that increasing awareness will put some momentum behind crowdfunding. Hopefully, as an industry we can keep that green flag flying.