Crowdfunding Needs To Go On The Warpath!

I cannot believe the opposition to the Crowdfunding component of the JOBS act. This is a classic case of government lifers protecting their turf.  

President Obama sent a strong message by signing the JOBS Act: This administration wants to actively participate in job creation, revive the American entrepreneurial spirit, and maximize the opportunities that modern technology can offer small business owners.

And the best part: It doesn’t cost taxpayers a dime. Just by cutting regulations, the JOBS Act energizes and modernizes an age-old formula. It’s simple: More funding for start-ups = more jobs. Kauffman Foundation’s research is clear:  All net new jobs in the last 30 years come from businesses fewer than five years old. Stimulating and enabling start-ups is the key to stimulating the job market.

The Crowdfunding opponents’ main objections? Fraud.

The SEC, along with several state securities regulators are “worried” that innocent, unsophisticated investors will be bilked by unscrupulous system gamers and scam artists. They actually equate this new frontier to the Wild West. Nothing could be further from the truth. And, by the way, this is the same SEC and state securities regulators that somehow missed Bernie Madoff, JPMorgan Chase, Lehman, AIG and Goldman-Sax, to name but a few. Are these the agencies that we want “protecting” us from predatory investors and scam artists? I think not.

Here’s a few reasons why their “concerns” are poorly grounded:

First, the SEC has another nine months in which to establish all sorts of regulations that will surely protect investors from fraudulent schemes. But, the best protection is baked right into the essence of Crowdfunding itself. That is, the crowds will ferret out any semblance of fraud and broadly report it before any investors have an opportunity to participate. The best example of this behavior can be seen by examining the recent Facebook IPO.

Within hours of the offering, millions of bloggers and reporters took to the airwaves reporting on the botched IPO, and this was “carefully” managed by people like JPMorgan, Morgan Stanley and the like. Imagine how quickly that information would have been disseminated were an actual crowd participating online.

Second, we have a lot of actual Crowdfunding history to dispel the notion of fraud. Indiegogo, for example, has been around for over a year and has distributed millions of dollars every month – losing less than 1% to fraud.

Third, that tiny fraud rate is not mere coincidence. Rather, it’s based on very specific efforts. From the very start of a campaign, today’s Crowdfunding sites capture relevant information from both campaign owners and campaign funders. Online tools constantly screen funding campaigns using a fraud algorithm built on hundreds of thousands of transactions (similar to PayPal, MasterCard, and eBay).

Finally, the realities of Crowdfunding limit fraud as well – as typically the first 30-40% of funds contributed are from friends and family, providing social proof before new investors come on board. Quite understandably, strangers are reticent to fund empty campaigns. And beyond fraud, there are additional information rights and investor protections written into the JOBS Act.

Setting the fraud concerns aside, the benefits associated with Crowdfunding are unique, and in addition to creating lots of jobs and potential wealth, the upside is huge:

1. Projects that begin through online Crowdfunding have built-in risk mitigation. That’s because the public nature of the solicitations forces transparency regarding demand for the product or service.

2. The Crowdfunding process facilitates marketing efforts even before a new company is operational. It provides an opportunity to test the message – after all, the whole process of securing funding involves social media networking, marketing, and brand-positioning.

3. The very nature of starting a business through an online platform provides exposure to potential customers that a bank loan doesn’t. It provides open access to anyone, anywhere, and is shared with like-minded friends through social media.

4. The data-collection inherent in online interactive activity provides new businesses with critical information. Brick and mortar businesses struggle to obtain data about existing customers – let alone prospects. The Crowdfunding world provides that data instantly and in volumes large enough to draw statistical conclusions.

5. Crowdfunding provides young businesses and ideas with money to launch those ideas.

6. Crowdfunding allows average Joes and Janes access to startups and opportunity to invest and become part of the next Facebook, Google or cool Indie film debuting at Sundance.

These guys (Pebble) raised $7 million in two weeks before they shut down the fundraising on KickStarter and are now making these cool smart-watches that work with iPhones and Androids. Now, of course, the very Venture Capitalists who turned them down and dying to throw money at them. In addition, they have created a development platform for smart-watch applications, which guess what, creates lots of new jobs. If this had happened after Crowdfunding for equity was lawful (next February) the investors would each own a piece of this company – now they just get a watch instead.

We are not the same society that we were in the 1930s when the Securities Act of 1933 was written into law. That act prohibited anyone worth less than $1,000,000 from investing in privately held companies. 

This is 2012. We have the Internet. We have news on a 24/7 cycle. We all use Facebook, Twitter and many of us Blog and Pin and send Instagrams. We are social networking junkies. We insist on authenticity and we love to share. The JOBS act acknowledges the changing world and is an attempt to reflect today’s realities in the world of investing and business creation.

The JOBS Act is a natural evolution of President Obama’s Startup America agenda. And perhaps nothing speaks to the value of Crowdfunding better than the successful businesses – and jobs they created – that owe their existence to the short history of Crowdfunding. Let’s all get behind this and make sure that the law, as passed is what we are going to get next February and not some crazy, restricted version that defeats the whole purpose.

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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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