I spend many waking hours advocating for crowdfinance and preaching about the economic repercussions of an unjust financial system that inhibits entrepreneurs from procuring growth capital and restrains unaccredited investors from acquiring higher yielding private securities.
I’ve dedicated more than four years to this endeavor because I wholeheartedly believe that a fundamental shift from institutional to crowd investing is crucial to preserving the capitalistic principles that fueled centuries of global innovation and upward mobility.
Because the fate of future generations depends upon the success of this mission, it is imperative that the underlying purpose of crowdfinance doesn’t get lost in the industry’s unbridled enthusiasm or lapses in judgment.
Crowdfinance emerged in response to deficiencies in capital formation. Through the melding of technological achievement and regulatory easing, crowdfinance is able to offer a more practical solution to enriching the capitalization process.
Crowdfinance provides businesses with the unprecedented ability to crowdsource inventions, pre-test product launches, gauge consumer demand and convert consumers into loyal stakeholders. This process gives weaker companies the chance to rectify flawed products or business models prior to raising sizeable rounds of capital. It also helps ensure that sounder startups make their way to a larger pool of investors.
While crowdfinance is certainly helping to democratize the flow of capital, it was never intended to guarantee it. Although, every business and investor – no matter the size – should be granted equal opportunity to access funds and build wealth, not all inventions or business plans are deserving of finance. Capital and profits are not entitlements; they are rewards which are derived from delivering quality products and services as well as from performing proper due diligence.
In order to provide solid investment returns, emerging businesses need to be built on a dependable foundation that is capable of driving customers, revenues and market share – not supported by hype, viral videos, brilliant PR campaigns and embellished financing disclosures.
Furthermore, as much as I’d like to see crowd-powered online marketplaces displace institutionally-controlled conventional exchanges, in order for this nascent industry to develop with integrity, it requires an ecosystem of bears as well as bulls. Investors need to be able to uncover potential hazards as they identify opportunities. It is virtually impossible for investors to make informed investment decisions if they are being fed half-truths by trusted financial media outlets. A financial structure, like a political system, can’t survive on advertisements, cheerleaders and spin.
Investors, regulators and even industry insiders received a wake-up call last month when Samuel Guzik, a recognized securities attorney most known for his thought leadership on Reg A+, drew attention to the dubious widespread practice of advertising the funding status of a private 506(c) offering by representing non-binding indications of interest as “commitments”.
According to Guzik’s articles on the CNBC Crowdfinance 50 index and on investor risk, “there is often a wide disparity between investors dollars shown as ‘committed,’ versus dollars which are ultimately invested in a company.” As a result, the investing public is falsely led to believe that companies are receiving financing when in reality they are merely being “liked”.
Hey Mark Cuban, want to have a serious conversation about venture capital bubbles? How about the one being formed with inflated funding data? What could possibly go wrong with investors relying on erroneous financial information? Remember when dot-coms reported barter deals as top line revenue offset by an advertising expense? Now that didn’t end badly. Insert sarcastic cough.
I am sure that everyone would agree that transparency should be the bedrock of crowdfinance. Unfortunately, it can’t exist in a vacuum. Indications of interest are not quotes. Could you imagine the uproar if market makers only displayed bids but no offers? If analysts only issued buy recommendations? Or if public companies were allowed to issue press releases announcing financing commitments without disclosing in an 8K the total amount raised?
As protocols to guide this industry are being implemented, we need to remind ourselves of the core mission of this industry. Crowdfinance has always been and will always be about leveraging technology and nondiscriminatory investing rules to breed more proficient businesses and foster more prosperous economies – not about finding a regulatory loophole to mass advertise unvetted deals.