Friday, March 16, 2012

In Defense of Crowdfunding

Crowdfunding legislation is tantalizingly close to becoming reality—the Senate is expected to pass a version of a bipartisan House bill within days. But a rash of negative publicity threatens to derail this important update to antiquated securities laws that hamper small business capital raising.


The problems stem from the Jump-Start Our Business Start-Ups act—JOBS, for short—a House package that rolled together a number of largely uncontroversial bills aimed at spurring small business capital raising, and added some new ones. JOBS has provoked a fierce outcry from consumer protection groups, regulators and pundits, who evoke alarming images of coke-snorting boiler room operators, Nigerian scammers and pump-and-dump research analysts. It seems this bill will make "Muppets" of all of us.


Let's all take a deep breathe and consider this.


The elements of JOBS sparking the most backlash are provisions that loosen regulations on public and pre-IPO companies, including exempting publicly traded "emerging growth companies" from certain reporting requirements, and letting issuers and financial firms peddle securities to accredited (aka wealthy) investors. Fair criticism. I don't see anyone taking issue with other elements of the bill, like raising the ceiling for Reg A offerings and increasing the number of shareholders (from 500 to 1,000) a private company can have before it is considered public.


The other key element of the package is a crowdfunding bill that had previously passed the House with near unanimous support. Crowdfunding has its share of detractors, for sure. But much of the recent criticism seems to be unfairly tarring crowdfunding and other good elements of JOBS with the same broad brush. In the Times, Floyd Norris declared crowdfunding "a major victory for Wall Street." 


That couldn't be farther from the truth.


Crowdfunding, as most people by now know, is a fundraising model where lots of small sums are aggregated from lots of people. Think Kickstarter.com, Kiva.org, and President Obama's initial presidential campaign. Crowdfunding legislation would move that model into the investment sphere, so  entrepreneurs could tap into their social networks to raise capital, and allow those investors to share in the profits. It's Kickstarter with a financial return. 


Under existing rules—rules that were crafted in the 1930s, in the age of ticker tape and telegraphs—that is illegal. Private companies may only raise money from accredited investors. If they want to reach out to their customers, their friends and family, their neighbors or social networks—a perfectly natural impulse—they must hire lawyers and accountants to guide them through a registration process and produce a bulky prospectus that hardly anyone reads. This process can easily cost $1 million or more—making it a non-starter for small firms that only need $10,000 or $100,000 or even a million.


These small firms are shut off from a huge pool of potential capital, at a time when bank lending and seed funding is down dramatically. And ordinary Americans are unable to invest in companies that they know and love and support.


Having spent the past two years talking to small businesses and investors, I can tell you that people want to invest this way. They would like to put their money in companies that they know, that are part of their community, or doing things they believe in. Just look at the success of Kickstarter, which has raised tens of millions of dollars in contributions for creative ventures. The site logged $1.6 million in pledges in a single day this week.


Before it shut down last month under pressure from regulators, ProFounder.com—a crowdfunding platform cofounded by a founder of Kiva—helped dozens of small businesses raise money from friends and family. This kind of capital is supportive, nurturing capital. It's the antithesis of vulture capital or "ripping the eyeballs out" of Muppets.   


In fact, crowdfunding presents a badly needed alternative to Wall Street-style investing. Just as Kickstarter allows independent artists to bypass the traditional gatekeepers like record studios and publishers to get their works produced, crowdfunding can help entrepreneurs with good ideas or promising growth potential get funding that is not forthcoming from banks or VCs. Millions of Americans have moved their money out of big banks to credit unions and community banks; many may want to do the same with some of their investment dollars.  


Yes, there is risk. Investors could lose money or be victims of fraud—just as they can in the stock market. Most of the proposed crowdfunding bills limit the amount that individuals can invest in a crowdfunded venture—the highest allowable amount among the bills is (the lesser of) $10,000 or 10% of their annual income—so the amount any one investor could lose would be limited. (In comparison, there is no limit to what they can lose in the stock market or at the casino, for that matter). The amount a company can raise is also limited, to $1 million (or $2 million with additional disclosure).


It is the risk of fraud that has most critics' knickers in a knot. Without a doubt, hucksters will ooze out of the ether. But there are commonsense measures included in the crowdfunding bills that can address the risk. For example, the Senate bills require companies to go through a crowdfunding intermediary to raise funds. The intermediaries (the equivalent of a Kickstarter or eBay) must register with the SEC. And they must hold funds in escrow until the money is released to the company raising it. In addition, state regulators can prosecute any offenders if someone manages to pull off a fraud.


The crowdfunding intermediaries will also perform a basic level of vetting of the companies they list on  their sites, such as background checks of principals and the like. And let's not underestimate the power of  hundreds or thousands of people dissecting a business plan and crowd-vetting an idea or a company. The Internet brings a new level of transparency to investing, in ways that the framers of the 1930s securities laws could never have imagined. In fact, crowdfunding has the potential to be more transparent than many other investments we can routinely make. Do you know what's in your emerging market mutual fund, or what the hidden fees are, for example? Do you really know what is going on inside that blue-chip bank whose stock you own? (Here's a hint)


Crowdfunding has been taking place for nearly two years in the UK without a hitch, funding hundreds of local businesses. Luke Lang, a cofounder of Crowdcube.com, which has raised more than £2.5 million in equity capital for more than a dozen companies since it launched a little over a year ago, fully expects some companies to fail; that comes with the territory. But so far there has not been a whiff of fraud. Likewise, on Funding Circle.com, British investors have lent more than £23 million to about 600 local businesses in the less than two years, with nary a Nigerian scammer or boiler room creep. 


The bottom line is, the financial system is broken. Small businesses—which create the majority of jobs, contribute half of private GDP and provide the biggest economic boost for their communities—are going begging for capital. Investor protections are predicated on the public markets, yet those markets are closed to 80% of the companies that need them, according to a report by Grant Thornton (pdf here). Small firms are simply priced out. The median IPO size has risen from $10 million 20 years ago to roughly $140 million today. 


We need alternatives. Done sensibly, with the right precautions built in, crowdfunding could unleash a new wave of innovation and job growth. The potential rewards vastly outweigh the risks. I hope Congress and the pundits will separate this issue from some of the more problematic proposals in the JOBS package. 

19 comments:

GTT said...

"(In comparison, there is no limit to what they can lose in the stock market or at the casino, for that matter)."

this is so on point... it really gets at what is happening here in the US..

ugh... "we" the American people can blow our wealth in areas where there are established and protected $ interests, but when it comes to creating - imagining - and innovating we turn need to super parent ourselves into self defeat.... this give and take can be so frustrating.

Donald Miller said...

You can support locavesting through investment crowdfunding today! A group of community leaders in Port Townsend, WA are raising capital to open a community owned retail shop. You can learn more and Washington State residents can invest today at invest.quimpermerc.com/

Unknown said...

Good investing tips.

Unknown said...

Nice Article Posting! Selective Financial Services provides the crowd funding to business. We are an investment and advisory firm that strives to provide expert solutions to create lasting values, for investors, in transactions in which we invest funds, or our financial expertise, and for the companies and individuals.

Unknown said...

Do you seek funding and the bank you deal with on a day to day basis has refused to help you?

You might qualify for our new concept and get funded with our help.
Our focus is on socially responsible, green, energy producing projects. The facility is however not limited to these basics, as long as you have a strong management team, a viable business plan, and exceptional growth potential. We also enable finance for growth and consider any commercial business with the potential for a high ROI already within the first year. And we can work with any legal financial transaction offering an above average return on investment.
If your requirement is within these basics, please let us have your answer to this simple question: "Would your own bank provide you with finance, if we guarantee for your loan through Deutsche Bank?"
If you see chances to get funded on that basis, then you should tell us how much money you seek. We will engineer a solution for your immediate funding requirement and explain how you can put this concept to work for you.

Send an email directly to RelationshipManager@SelectiveFinancialServices.com now and visithttp://selectivefinancialservices.com/project-finance

Unknown said...

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Sekaran00 said...

We are specialist in providing direct and genuine provider of BG, SBLC, MTN, CD,LC , Non collateral loan, confirmable Bank Draft and other financial assistance from AAA rated bank (Prime Bank) our Leasing price of (5.0% + 0.5% + X) of face value of the instrument. The financial instrument can be invested in High Yield Trading Program or Private Placement Programme (PPP). thus our Bank Guarantee lease , the Direct Bank Guarantee and Indirect Bank Guarantee, which is used as Bid Bond, Payment Guarantees, Letter of Indemnity,Guarantee Securing Credit Line, Advance Payment Guarantees, Performance Bond Guarantee E.T.C.

We are RWA ready to close leasing with any interested client in few banking days, we deliver promptly as set forth by our agreement. we have direct contact with the principal, mandate and brokers. we ensure unequaled service and will be glad to share our working procedures with you upon request to help us proceed towards closing deals effectively

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Bernard said...

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With our financial/bank instrument you can establish line of credit with your bank and/or secure loan for your projects in which our bank instrument will serve collateral in your bank to fund your project.

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Raymond Doison said...

We are project funder as well as financial lender,We have BG/SBLC, specifically for BUY/LEASE at a leasing price value Issuance by HSBC London and other 25 top AA rated Bank in Europe, Middle East or USA. We also secure funding.

Our BG/SBLC Financing can help you get your project funded, loan financing, please let me know if you are interested in any of our services, by providing you with yearly renewable leased bank instruments. We work directly with issuing bank lease providers, this Instrument can be monetized on your behalf for 100% funding.

FOR LEASING OF BG/SBLC
MINIMUM FACE VALUE OF BG/SBLC = EUR/USD 1M
LEASING FEE = 4%+1%

FOR PURCHASE OF FRESH CUT BG/SBLC
PRICE = 32%+1%
MINIMUM FACE VALUE OF BG/SBLC = EUR/USD 1M

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Chowdhury said...

We are financial service company in Leicester,United Kingdom, we assist our clients(mainly corporate bodies) in meeting their financial needs by raising Bank Guarantee and SBLC for lease and purchase which can be used for a variety of purposes like collateral for loans at banks, guaranteeing performance in a contract among other things.

Kindly contact for genuine inquiries and I can provider you with the needed information.

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Cheers
Utpal

Chowdhury said...

We offer seasoned and fresh cut bank instrument for lease/sale, such as BG, SBLC, MTN, Bank Bonds, Bank Draft, T strips and other. Leased Instruments can be obtained at minimal expense to the borrower compared to other banking options. This offer is opened to both individuals and corporate bodies.

Kindly show your interest as soon as you are in need of our services to enable us furnish you More Details.
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Nat Finance said...

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WRIGHT said...

We are direct providers of Fresh Cut BG, SBLC and MTN which are specifically for lease, our bank instrument can be engage in PPP Trading, Discounting, signature project (s) such as Aviation, Agriculture, Petroleum, Telecommunication, construction of Dams, Bridges, Real Estate and all kind of projects. We do not have any broker chain in our offer or get involved in chauffer driven offers.

We deliver with time and precision as sethforth in the agreement. Our terms and Conditions are reasonable, below is our instrument description.

The procedure is very simple; the instrument will be reserved on euro clear to be verified by your bank, after verification an arrangement will be made for necessary bank documents and stock testing expenses, the cost of the Bank Guarantee will be paid after the delivery of the MT760,

DESCRIPTION OF INSTRUMENTS:

1. Instrument: Bank Guarantee (BG/SBLC) (Appendix A)
2. Total Face Value: Eur 5M MIN and Eur 10B MAX (Ten Billion USD).
3. Issuing Bank: HSBC Bank London, Credit Suisse and Deutsche Bank Frankfurt.
4. Age: One Year, One Month
5. Leasing Price: 6% of Face Value plus 2% commission fees to brokers.
6. Delivery: Bank to Bank swift.
7. Payment: MT-103 or MT760
8. Hard Copy: Bonded Courier within 7 banking days.

We are ready to close leasing with any interested client in few banking days, if interested do not hesitate to contact me direct. wrightjames931@gmail.com

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MHN BUILDERS AND CIVIL CONTRACTORS said...


I have two financial requirements.

1. I want to bring funds to india to invest in real estate business upto 30 millions usd required.

2. I want to invest in Dubai trade desk upto 200 million usd.

Please suggest how to get funds through SBLC & monitisors.

Also requesting you to suggest any better financial options available with you as suitable for my requirements. Also suggest any investors who are really interested to invest in india. Also let me inform any other financial deals also from your end or through your network. We have bank facility in various countries.

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MHN RAMESH

WRIGHT said...

We are direct providers of Fresh Cut BG, SBLC and MTN which are specifically for lease, our bank instrument can be engage in PPP Trading, Discounting, signature project (s) such as Aviation, Agriculture, Petroleum, Telecommunication, construction of Dams, Bridges, Real Estate and all kind of projects. We do not have any broker chain in our offer or get involved in chauffer driven offers.

We deliver with time and precision as sethforth in the agreement. Our terms and Conditions are reasonable, below is our instrument description.

The procedure is very simple; the instrument will be reserved on euro clear to be verified by your bank, after verification an arrangement will be made for necessary bank documents and stock testing expenses, the cost of the Bank Guarantee will be paid after the delivery of the MT760,

DESCRIPTION OF INSTRUMENTS:

1. Instrument: Bank Guarantee (BG/SBLC) (Appendix A)
2. Total Face Value: Eur 5M MIN and Eur 10B MAX (Ten Billion USD).
3. Issuing Bank: HSBC Bank London, Credit Suisse and Deutsche Bank Frankfurt.
4. Age: One Year, One Month
5. Leasing Price: 6% of Face Value plus 2% commission fees to brokers.
6. Delivery: Bank to Bank swift.
7. Payment: MT-103 or MT760
8. Hard Copy: Bonded Courier within 7 banking days.

We are ready to close leasing with any interested client in few banking days, if interested do not hesitate to contact me direct. wrightjames931@gmail.com

Regards,
Wright
Skype;
wrightjames931@gmail.com

rsileaseonsult said...


Dear Sir/Madam.

We offer seasoned and fresh cut bank instrument for lease/sale, such as BG, SBLC, LC, DLC, Bank Bonds, T strips and other. BG/SBLC Financing can offer individuals and corporations Leased Instruments. Leased Instruments can be obtained at minimal expense to the borrower compared to other banking options.

DESCRIPTION OF INSTRUMENTS:
1. Instrument: Bank Guarantee (BG/SBLC)(Appendix A)
2. Total Face Value: EUR/USD 1M MIN and EUR/USD 5B MAX (Five Billion USD).
3. Issuing Bank: HSBC, London, Deutsche Bank Frankfurt or any Top 25 AA Rated Bank
4. Age: One Year, One Day
5. Leasing Price: 3% of Face Value plus (0.5%+X) commission fees to brokers.
6. Delivery: SWIFT TO SWIFT.
7. Payment: MT-103
8. Hard Copy: Bonded Courier within 7 banking days.
9. Purchase price 32+2

The Leased Instruments includes: BG’s, Insurance Guarantees, MTN,(SBLC) Standby Letters of Credit and Third Party Guarantees such as a standby forward commitment to purchase or a standby loan. If you are a potential Investor or Principle looking to raise capital, we will be happy to answer any questions that you have about this opportunity and to provide you with all the details regarding this services. Our BG/SBLC Financing can help you get your project funded, by providing you with yearly renewable leased bank instruments.

We work directly with issuing bank lease providers. You will work with your bank to ensure that the leased instruments will be returned to them before the maturity date. This Instrument can be monetized on your behalf for Trade in PPP. If interested in our bank instrument offer kindly contact me via Email.

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Contact: rsi.leaseconsult@gmail.com
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WRIGHT said...


We are direct providers of Fresh Cut BG, SBLC and MTN which are specifically for lease, our bank instrument can be engage in PPP Trading, Discounting, signature project (s) such as Aviation, Agriculture, Petroleum, Telecommunication, construction of Dams, Bridges, Real Estate and all kind of projects. We do not have any broker chain in our offer or get involved in chauffer driven offers.

We deliver with time and precision as sethforth in the agreement. Our terms and Conditions are reasonable, below is our instrument description.

The procedure is very simple; the instrument will be reserved on euro clear to be verified by your bank, after verification an arrangement will be made for necessary bank documents and stock testing expenses, the cost of the Bank Guarantee will be paid after the delivery of the MT760,

DESCRIPTION OF INSTRUMENTS:

1. Instrument: Bank Guarantee (BG/SBLC) (Appendix A)
2. Total Face Value: Eur 5M MIN and Eur 10B MAX (Ten Billion USD).
3. Issuing Bank: HSBC Bank London, Credit Suisse and Deutsche Bank Frankfurt.
4. Age: One Year, One Month
5. Leasing Price: 6% of Face Value plus 2% commission fees to brokers.
6. Delivery: Bank to Bank swift.
7. Payment: MT-103 or MT760
8. Hard Copy: Bonded Courier within 7 banking days.

We are ready to close leasing with any interested client in few banking days, if interested do not hesitate to contact me direct. wrightjames931@gmail.com

Regards,
Wright
Skype;
wrightjames931@gmail.com

WRIGHT said...

Finding a genuine provider of financial instrument is very challenging but we are certified Financial Instrument providers in United Kingdom. Presently, we only focus on BG/SBLC for Lease and Sale transactions. However, our Lease BG/SBLC is 6+2% and Sale at 40+2%.

Should you find this interesting and acceptable? Kindly, contact us and we shall review and respond with draft Contract/MOU within 48hrs maximum.

Please request for full procedure details if interested.

For further inquiry contact:Wright James
Skype:
wrightjames931@gmail.com
Emai:
wrightjames931@gmail.com

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