A word or three about the Crowdfunding bill.
It will change the way startups do business, most notably by making it legal for them to accept investments from a large number of “unaccredited” investors.
Many analysts estimate that there is more than $50 million in funding waiting on the sidelines that will be invested in over 1000 companies once this bill becomes law. And, like many proponents of the JOBS Bill, they believe it’s a good thing that less wealthy Americans who don’t qualify as accredited investors will now be able to put their money into young businesses and reap the rewards.
But before you go all in on “Isabella and Me” or “Roll Up the Rim”, stop for a minute and think. Can you afford to lose that money? Do you have any idea who is behind “Isabella and Me”, and why you should trust your $500 to those clowns? Are you certain that “Roll Up the Rim” isn’t 3 guys from the Ukraine who just got out of the Vladimir Central Prison and are super-computer savvy.
When you prepare to invest in a start-up. you need to at least take a short course in “I was a Venture Capitalist for a Day.” There are lots of what are called “due diligence” questions you should get answered. iPeopleFINANCE will of course, be able to answer them for you when we launch in September. In the meantime, at least consider the elements of fraud that several annoying, but well-meaning Democrats freaked out about to the extent that they managed to delay the bill and then fill it with regulatory traps which they believe will mitigate fraud.
So, just for a little perspective, the Crowdfunder Infographic below claims that of the more than $430 million dollars invested in Kickstarter, CrowdCube and Prosper, there have been zero cases of fraud. While we don’t know of any official fraud cases brought against Kickstarter backers by law enforcement, we would like to take issue with that number.
Adrianne Jeffries at Betabeat has reported on two separate Kickstarter projects that drew allegations of fraud. Backers put $27,000 into the Tech-Sync Power System before the project was mysteriously cancelled after failing to explain how it could deliver on its promise.
Perhaps more striking is the case of Vere Sandals. The project was successfully funded more than one year ago, on March, 1 2011, raising $56,618 from 1,091 backers. Just five hours ago, frustrated backers were still leaving comments on the project page asking why they still had not received their sandals. More infuriating to those who pledged money is that Vere Sandals has begun retail operations, selling shoes directly to merchants, without first completing its commitment to its Kickstarter backers.
“Over a year ago I backed a new company — Vere Sandal Co. — that wanted to get in business. Never had I anticipated that using the backer’s money to finance retail business would be the result,” wrote backer Rajesh Patel.
“That they were shipping to retailers even as they were making excuses to backers just makes a bad situation worse. Personally I don’t expect I’ll be seeing the sandals, getting my money back or even hearing from these folks. They have made clear how they do things and it is merely a case of ‘backer beware’,” wrote Dan Cohen.
“How can you ship to retailers before the people who backed you over a year ago? This company is a total scam and I want my investment back!” wrote Adam Browning.
There was never an official contract between the backers and Vere Sandals. As Kickstarter’s terms of service make clear, “Kickstarter is not liable for any damages or loss incurred related to rewards or any other use of the Service. All dealings are solely between and among Users. Kickstarter is under no obligation to become involved in disputes between any Users, or between Users and any third party.” Ah, but investors do have complete power over their investments. All they have to do is make their investments conditional upon a simple contract that guarantees a return, should a variety of conditions ensue. Kickstarter should really be doing this as part of their 7% fee. But, they don’t. Today.
My favorite stat is “If Americans shifted 1% of the $30 Trillion they hold in long-term investments, to small-businesses instead, it would amount to more than ten times the venture capital invested in all of 2011.” Amy Cortese, Author of Locavesting.
Hopefully, as this legislation becomes law and as more sophisticated crowdfunding platforms are launched into the space, they will assure they will be responsible stewards for investors’ money, advise investors as to the due diligence already undertaken before the project is launched, and the result will be the huge boom in small business, wealth and jobs creation that the law portends. iPeopleFINANCE will do all of this and more. Stay tuned.