How risky is Crowd Fund Investing (CFI)? Capital Flow & Investor Protection

Crowd Fund Investing is probably less risky than public companies because the crowd has access to more, and easier to understand, information about the entrepreneur and his company.  In CFI, no one is forced to make an investment.  Quite the contrary, people typically won’t make an investment unless they feel comfortable about an idea and the entrepreneur behind the idea. His executive summary will discuss the idea, how it will make money and why people should invest in him.  Since CFI is an “all or nothing” platform, if an entrepreneur doesn’t hit his funding goal because he didn’t have a winning idea or he asked for too much money, then the investors don’t fork over their cash.

Doing nothing isn’t an option because if we don’t get capital flowing to entrepreneurs/startups, then they won’t create the jobs that will spur the economy. Since the banks aren’t lending, credit cards are charging exorbitant interest rates and the private equity folks are only concerned about the next Facebook, someone has to help the little guy.

Crowd Fund Investing is based on groups of individuals giving small amounts of money, $50, $100, $500, to entrepreneurs to help them start their businesses.  While we suggest a $10,000 limit to each investor, based on the way crowd funding works, we highly doubt individuals will be making singular, large investments like that.  Another way, we reduce risk by limiting exposure.

On top of this, in our proposal, entrepreneurs will be limited to raising no more than $1M.  Most entrepreneurs, however,  will not be looking for $1M, so defrauding people of a lot of money will be limited and second, anyone who wants to take advantage of an investor has to manipulate many small investments; hardly enough, we believe, from warranting a crook from coming up with a Madoff-type scheme to take advantage of a bunch of little investors.  At that, he better be good because the crowd’s going to ask him a lot of questions about his business model.  We suggest the entrepreneurs raise capital in “rounds.”  Each round should be limited in scope and the entrepreneur should be required to meet milestones before moving on to successive rounds.  Communicating with the crowd and meeting milestones will create credibility with the crowd for future rounds or the entrepreneur won’t be able to raise any more money.

With the internet the way it is today, you can’t open your mouth anymore without someone having something to say about it.  So as for investor protection we think there’s something to be said about crowd vetting.  Because no one is holding a gun to the crowd’s head, individually, they will have a voice in whether or not they decide to invest.  The crowd can also research information about an entrepreneur online, see his approval rating on websites like ebay, see peer reviews on linkedin or see what he’s tweeting about.  We also think the entrepreneurs should be willing to provide their credit information to either show their credit worthiness or explain why the investors shouldn’t be concerned.

The platforms that have the most success when this legislation passes will be the ones that have mitigated risk for the investor, developed tools to hold the entrepreneur accountable and have transparency for all.  There’s only so much you can do.  Commonsense rules like the ones we have presented provide a framework from which to make this happen.  When it comes to little sums like this that can mean the world to a startup, we need to rethink these antiquated laws.



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