Pennsylvania Fearmongers Attack Crowdfunding.

Hopping Mad as Commissioners Go Over the Line.

This is a re-post by David Drake of LDJ Capital & The Soho Loft.

A shocking press release hit the net last week, purportedly from the Pennsylvania Securities Commission. The link to the “advisory” goes to http://www.psc.state.pa.us, but that site doesn’t seem to host a copy. Even so, if the press release is accurate, it amounts to an unfair characterization of the JOBS Act and new Crowdfunding regulations.

Crowdfunding under the Act is portrayed as creating a Wild West style free-for-all that will attract fraud and con artists of all stripes. They cite the current lack of hard and fast rules to govern the sector and then assume no rules will be in place before next year’s launch. That’s nuts.

Here’s a typical quote:

Commissioner Steven Irwin summarized, “The way the new law was written, it’s pretty much ‘Buyer beware.'” He added, “It’s not that we don’t need new incentives to attract more investments in startup companies. It’s just that the lax oversight implicit in the new law is likely to attract people trying to game the system and scam people out of their hard-earned money.”

Excuse me?  RocketHub has had zero fraud incidents since launch in 2009. 

The plain fact is that we do need a new structure to help start-ups. Crowdfunding and micro-financing is an ideal way for new investors to participate and energize our sluggish economy. Small entrepreneurs find themselves shut out of the game. A game that already has its critics.

Take a look at the analysis of VC opportunities as they exist now – you have the WSJ exposing a scheme where GP’s rake in the major profits while late-comers to an investment bear the burden of more risk and lower rewards.

A history of overblowing risks!

It seems the PASC takes their watchdog role very seriously. They did a similar warning back in 2010, only then it was another piece of federal legislation: PA Regulators Warn: Investor Scams, Like Flu Virus, Will Mutate to Adapt to New Federal Financial Reform Bill. Here are some of the entries on their top ten list of investment traps then: ETFs, forex, gold and precious metals, “green” investments, and oil and gas.

It seems their motto is, “panic first.” And that may be their charge. After all, as a state run commission, they should have one eye on regulations and another looking out for scofflaws. But this latest hit piece goes too far.

Of course there needs to be rule-making to regulate the Crowdfunding market. Everyone agrees on that.

Of course disclosure and investor protections have to be front and center.

And read what Pennsylvania Securities Commission Chairman Robert Lam had to say in their Spring Bulletin: “The Internet is a powerhouse, and maybe – just maybe – Crowdfunding will be a good thing once it matures and we have some ground rules in place.” Somehow Mr. Lam moved from cautious optimism to fear monger – while the rules are still being written at the SEC. At the risk of being repetitive – That’s nuts.

Our real concern isn’t about one small department in one state. Our concern is that this mischaracterization of Crowdfunding will catch on without those in authority positions doing their homework. Crowdfunding is worthwhile and it offers something no other framework can – access to funding for those too small to interest VC players.

Good ideas and good companies deserve a chance to present their case to the public, and the public deserves a chance to reap the rewards.

A turf war between federal and state regulators shouldn’t have the ability to libel an entire market. Should it?

One editorial comment: The very essence of crowdfunding, aka the crowd, is the built-in protector acting on behalf of all the investors, aka the crowd. The crowd will quickly, in fact virtually instantly, call out the fraudsters and the system gamers before any crowdfunded offering gets off the ground. Um, that is the whole idea behind crowds.

So, my question is, would you rather place your $100 in the hands of a Wall Street banker to invest in, I dunno, Proctor and Gamble? Or, would you rather place it in the hands of the next Facebook, with the support of 1,999 others (aka a crowd)?

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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