Crowdfunding. A Little More Work To Do.

As excited as I was about the passage of the JOBS act in the Senate, I am now worried about the constraints the SEC has managed to shove into the Crowdfunding component of the bill. So, there’s some more work to do. 

 After passing HR2930 in the House, this 6-pack of small business modernization reforms cleared the Senate. While most things were left intact from the House bill, the crowdfunding component was tweaked to allow for “more investor protections”. In my opinion, crowdfunding was the most economically important part of the bill, so it’s no surprise that the special interests have dipped their fingers in the mix. Unfortunately, America will pay a price for this in terms of brain-drain. Sound familiar?

Look at the growth:

In over four years of operation, leading crowdfunding site Indiegogo reports virtually no fraud. U.K. crowdfunding leader Crowdcube (which does allow equity finance) reports no fraud.  As is the case for U.S. based peer-to-peer lending site Prosper or AngelList, the popular site for angel investors searching for deal flow from entrepreneurs.  As IBM salesmen thoroughly taught us, never let the facts get in the way of a good FUD story.  If you commit fraud online, your life is over.

Fraud feeds on opacity and on small groups, because those factors increase the probably of not being “found out”.  Ironically, that would well describe the environment of the traditional investment paradigm.  But in the social networking sphere, the more viral any story gets, the more the chances that fraud will be exposed by the people who would know.  Take for example, the recent viral story of the guy who claimed to achieve flight with a bird-like flapping contraption.  It was actually a hoax, 8 months in the making, from a Dutch artist.  Time for the world to find out it was a hoax and have the artist “fess up” — measured in hours.

As reports SBE Council CEO Karen Kerrigan about the recent Senate vote, “We would have preferred that crowdfunding provision to be less onerous and complex for small businesses, and feel the Securities and Exchange Commission has been given too much rein from a regulatory perspective.”  Apparently the SEC, who recently warned that the JOBS Act may harm investors, has not had the time to learn about the years of crowdfunding and social networking experience that we have already.  Perhaps, they are too busy trying to find out where the still-missing $1.6 billion went, that is owed to 35,000 MF Global customers.

But the worst part of the onerous changes is something that few seem to have contemplated.  Every extra bit of regulatory complexity is not only costly to American small businesses.  It will also create an unfortunate “brain drain”.  It’s very simple.  If we make it hard for Americans to invest in crowdfunding, then entrepreneurs will tend to get funded with larger percentages of foreign money.  Even worse, limitations on the amounts or percentages that Americans can invest in national crowdfunding, will force Americans to crowdfund invest overseas. Well, duh!

Many countries are watching the crowdfunding legislation intently and will “fast follow” with their own regulatory changes, the first being to allow US investors to participate in Foreign National deals.  Thus, we absolutely need to keep regulation clean, lightweight and harmonizable.  It may seem counter-intuitive at first, but every extra regulatory hurdle will produce further economic and entrepreneurial brain drain.  Why on Earth, would we want to limit the amount that Americans can invest in their own country?  Let’s please not make this the “Suck America Dry Act”.  Please contact your Representative and request that they “keep the SEC out of crowdfunding”.  Send them this blog post if you like.

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