Crowdfunding has been a topic that has been discussed in Congress for a while now. Although the House of Representatives and the Senate have passed their respective versions, we have yet to see any further action…
yes, it is an Election Year….
So as you may already know, during an Election Year very little movement occurs in Washington D.C. Aren’t you glad to know that during a 4- year presidential term, 25% is spent fighting for the position as opposed to doing things to improve the nation and put things in motion to help the constituents…BUT this I am not a political pundit nor is it my place to discuss the politics of election…
What I really wanted to talk about is what exactly are the concerns behind passing this legislation? Initially it was set to protect the ‘unsavvy’ participant that often was (and still is) coerced by phony telemarketers and the like to give up large chunks of their net worth.
1. Internet crowdfunding falls under an obscure definition of ‘general solicitation’, but in the most remote sense.
I’m okay with banning phone conferences and group meetings where someone is there to exclusively convince you that their next hair cream will effectively have a forest blossoming from your scalp in 3 days with only a monthly payment of $500. I don’t think that’s what we intend by legalizing crowdfunding. Innovative start-ups that require non-traditional sources of access to capital will be sharing their idea online. Persuasive tactics are limited to social media marketing and other internet tools that are used today…
Wait, companies are allowed to use marketing tactics such as this to convince the consumer that their company / service / product is better. Why can’t a start-up ask for a nominal investment?…
2. The contemplated crowdfunding legislation will most likely limit the capital raise to $1.0 million.
Yes, $1.0 million is a lot of money. However, we think about this in the scope of businesses and the financial realm in general. We have run into numerous multi-BILLION dollar scams and issues in the financial services industry over the past 5 years. This is not including the housing melt down or the Euro Zone crisis. Once again this is not a political opinion paper, however, you have to fall into tens of thousands of scams in the $1.0 million range to even come close to the impact of the losses that were generated within possibly the most highly REGULATED industry on the planet.
I hate to say it, as this will spark debate amongst economists… could regulation actually not be the best option for the economy?
3. Crowdfunding as a concept is self-regulated and self-governed
No matter how nominal the amount of investment, most likely, people will invest in start-ups that:
(a) have a co-founder that they know;
(b) have a co-founder that someone they know, knows (etc);
(c) operates in an industry they are familiar with; or
(d) knows someone who invested in that specified start-up.
So now if the majority of all investments are made within a unique combination and / or permutation of the above scenarios, pretty safe bet that it will be very difficult to pull a fast one. Particularly on a group of crowdfunders that are connected by social media, forums, online communities and the like, negative opinions and or suspicions are viral.
4. Crowdfunding as a concept is legal, but only if it a donation?
This is a bit mind boggling to me. This is not criticizing the crowdfunding community as it currently exists, but rather the slow rate of the movement in Congress. There are businesses that are currently being funded on a donation basis, but are not allowed to share economic incentives with their funders.
How is it that businesses are permitted to solicit donations (DONATIONS, in case you missed it), but businesses are not allowed to provide their supporters with interests in the company so as to share in the profits and the upside?
Congress is moving slowly, but I still have hope that perhaps, just maybe, this year they are able to put their differences aside on election matters to ensure that America does not fall behind once again in entrepreneurship and innovation.