So..recently there have been a barrage of articles that have spoken of the JOBS Act as both the savior of the American economy and on the other hand, the harbinger of fraud and con artists that will bring about the Dark Ages Part II.
Without going into the specifics of the many issues that have been raised… I think it’s important to figure out what it is that many point-of-views are missing in the bigger picture.
Yes, the JOBS Act does involve a bit of deregulation, but opponents are screaming claiming that this deregulation would unravel the very fabric of investor protections that we put into place to begin with. To their credit, I will even go so far as to say that this deregulation may incur some situations of dishonesty. HOWEVER, no one seems to point out the fact that stricter regulation has not necessarily been the best protective measure. With overbearing restrictions and massive libraries of procedures and regulations, we are often lulled into a false sense of confidence. Some of these regulations are absolutely necessary in light of the complex instruments that exist within our financial services industry today. But what this creates is what I like to call ‘the pinhole effect’. Quickly summarized, when the regulations are so cumbersome and overbearing we often miss the smaller incidences of dishonest behavior often ending in the worst of situations.
Deregulation to support the economy by decreasing the cost for companies to IPO should be a big boost for the economy. As any business owner knows, because you are a multi-million dollar company seeking to IPO does not imply you have the financial strength to spend large amounts of capital in order to register with the SEC. The question becomes, how much of that capital is really creating value in the long run by forcing businesses to be ‘compliant’ and on the other hand decreasing value by distracting focus from business development in order to comply with the SEC. Of course I am speaking of those honest business founders.
There are many people who are upset that the government has decided to permit crowdfunding for investments. I will start off with this. I am
currently permitted to ‘donate’ money (albeit on a taxable basis) to for-profit entities in return for items that may or may not ultimately be delivered. There is no legal consequence as the crowdfunds are considered more or less a gift. However, I am not permitted to take an economic interest in the same companies that I am supporting. So for my funds I can support someone else’s entrepreneurship endeavors, receive a gift and see them sailing off into the sunset with mojito in one hand and millions in the other.
I don’t want anyone to take this the wrong way. I think the philanthropic model is great and has functioned well for everyone involved. What I don’t really understand is why people think it’s a bad idea for the same type of people to become investors. Here are the reasons that have been quoted:
Crowdinvestors may not understand the business – Fair point. But for many businesses they may become the end user. If you were around when Apple was not yet public, but you loved their business, wouldn’t you have wanted the opportunity to invest whether or not you knew the ins and outs of the financial ramifications or business constructs? I’m not encouraging lack of knowledge, just a more open mind..
How can investors be sure what they are getting? - Like I mentioned above, it’s been caveat emptor from the very beginning of the crowdfunding space and has worked out extremely well. Also, it should be the job of intermediaries to help out in this area!
What if the business doesn’t succeed? - It’s a risk – return profile that needs to become a part of the education process for future crowdinvestors that want to become involved in the space! Even if you lend money to your friend, you have a risk of never seeing a dollar back..
I could probably go on and on, but what do YOU think?