Monday, January 7, 2013

The Real Risk With Crowdfunding

When the JOBS Act was signed into law last April, entrepreneurs were elated, even giddy, at the prospects. They and other supporters saw it as a democratizing force that could unlock new sources of capital for job-creating entrepreneurs, boost the economy and give Wall Street-wary investors a profitable alternative. It was one of those disruptive innovations that comes along once a generation and radically transforms the competitive landscape. It was so potentially revolutionary that pundits and financial pros alike predicted it would put many venture capitalists and banks out of business—in other words, exactly the sort of game-changing opportunity that makes entrepreneurs dream big.  

Well, ten months later, the enthusiasm has cooled. Not for the potential of crowdfunding, but for the realistic chances that it will be enacted anytime soon and in a form that honors the original intent of legislators to ease the bottlenecks that prevent so many entrepreneurs and small business owners from obtaining the capital they need to grow, hire and thrive. The SEC, which was charged with writing the rules that will govern the nascent crowdfunding industry by year-end, has missed that deadline (not surprisingly–the agency is concerned about the potential for fraud and has a lot on its plate already). Most people now believe true investment crowdfunding will not get underway until 2014. At the same time, it appears likely that the rules will require the new crowdfunding portals to be regulated much like conventional broker-dealers—in other words, more Merrill Lynch than eBay, as one observer put it. For better or for worse, crowdfunding may turn out to be a game not for idealistic entrepreneurs but for well-capitalized investment pros. 

As I wrote in my recent feature for the New York Times, despite the uncertainty, the outlines of a new industry are beginning to take shape, and with it a glimpse of what a crowdfunding future might look like: promising young companies able to get funding from people who  believe in them, regardless of those investors' net worth; new jobs being created by the availability of growth capital; and more broadly shared prosperity and economic opportunity. Sure, there is a risk of fraud and loss with crowdfunding. But then, that takes place every day on Wall Street. As Thom Ruhe, vice president for entrepreneurship at the Kauffman Foundation, told me, with the economy stuck in limbo, the bigger risk to the economy is to do nothing at all. 

4 comments:

Barry Rickert said...

There are big issues with equity crowdfunding for the masses. It is not so much about protecting them it is more about educating them. There is a better, simpler solution that is not a security, not a loan, not a debt, not factoring... It is the Royalty Way to fund a business and earn revenues.

Tim Wright said...

Amy it will happen and already is of course in the UK and other geographies. Already have examples of equity based crowd funded companies returning for a second round. what will be interesting is when a secondary market for these illiquid assets develops - so a crowdexchange so to speak

Allison Zoie said...

There are enormous issues with value crowdfunding for the masses. It is less about securing them it is progressively about instructing them. There is an improved, less troublesome result that is not a security, not a credit, not an obligation, not calculating... It is the Royalty Way to store a business and win incomes business funding australia .

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