Today was a frustrating day for Crowdfunding. The Senate Banking Committee, one of the most powerful committees on Capitol Hill held a hearing called, ‘Spurring Job Growth Through Capital Formation While Protecting Investors.’ It should have been called, ‘Why We Need to Stop Americans From Investing $1,000 into their Community Entrepreneurs.’
Anyone attending today’s hearing could tell it was to listen to special interests and regulators talk about the risks inherent in investing under the current system and why we need to protect consumers. There was no discussion about protecting people from spending their $1,000 paycheck on a lottery ticket, gambling it on Red in Vegas, nor spending more than that on their credit cards and being locked into interest payments upwards of 36% on the balance.  For some reason, the only area they feel we need to provide prudent consumer protection is when a person is making a decision where they want to invest their money.  Why? Because the expectation is different. Yes, we expect to win the lottery. Oh wait, no we don’t.
What’s the point of having a hearing about small businesses and capital formation if there isn’t one panelist that is an entrepreneur, small business owner or crowdfunding expert? How do you have a balanced discussion of crowdfunding if there is no one on the panel to discuss how crowdfunding works, the merit of allowing the community to back their local entrepreneurs, how the crowd will only fund those ideas they collectively decide are worth and how the social media connectivity will expose fraud and foster winning ideas. More importantly, if you don’t have a crowdfunding representative on the panel, how do you expose the blatant misrepresentations from the other panelists about crowdfunding?
One of the most frustrating parts of the hearing was when John Coffee the anti-crowdfunding law professor from Columbia said crowdfunding could lead to a situation where unlicensed, nefarious salesmen “who look like Danny Devito,†could set up shop in a bar or coffeehouse and peddle risky offerings to unsophisticated investors. And “In its current form, [Senator Brown’s] bill could be called the Boiler Room Legalization Act of 2011,†Boy does this drama sell. His fabrication immediately became the cover story for Investment News.
If you are reading this, you understand that the Crowdfund Investing framework we put together is based on a few main principles:
- Social Networking – you are raising capital from your friends, family and community. Your 1st degree connections.
- Communication – you must clearly articulate to your friends, family and community what you are doing, why you need this money, why they should trust you to do what you say and why this is a good investment opportunity for the crowd.
- All or nothing financing – using the principles of lean startup, you should set the minimum amount of money that you need to accomplish the milestones that you set out to your investors. If you don’t hit that funding target, you aren’t funded.
You also know that the very first thing we advocate is a fraud/background check to keep unsavory people from participating. That Crowdfund Investing platforms will need to be registered with the SEC and that we advocate for communicating who (including name, address, social security number, etc) is raising money on crowdfunding platforms and sending that information to both the SEC and the State Regulators.
What the panelists were discussing today was another form of Reg D offering without the safeguards that we’ve been advocating for 11 months. Not one of the panelists today acknowledged how crowdfunding works or any of the principles above. Obviously, just looking at them, it is clear that none of them have a Facebook page, have tweeted or blogged to a community that follows them. No wonder they don’t understand how crowdfund investing would work.
Why is it that the people who are crafting the rules under which entrepreneurs can raise capital are the same people who benefit from the rules not changing or changing in their favor?
At the end of the day, why not focus on what we do know. Crowdfunding has been around for over 5 years now. Over half a billion dollars has been given away and while we still expect people to do what they say with their money, no one has complained of fraud. It’s worked well enough up to now, under our framework it will continue to work well but have the added benefit of spurring entrepreneurialism and JOBS!
