Risk Shouldn’t Stop Crowdfunding in the United States

 

The crowdfunding news wire has been rife with warnings and doomsaying as of late from all corners of the globe.

Crowd-funding dark side: Sometimes investments go down drain

 

Is Crowdfunding Too Risky for the Average Investor?

 

FSA: ‘Crowdfunding’ for sophisticated investors only

 

PA Securities Commission Warns of Potential Dangers of Crowdfunding Investments Promoted Online

Equity crowdfunding is a gamble, no doubt.  Startups eagerly wait on the sidelines while regulators and advocacy groups hand-wring over the final details of the JOBS act.  Once the JOBS act becomes law and crowdfunding for equity becomes legal in the United States startups will be participating, and startups fail at a high rate.

Startup Failue by Industry, University of Tennessee

However, gambling is legal in parts of the United States and has seen expansion recently thanks to promises of increased tax revenue for participating states.  We are based in Ohio and witnessed implementation of new legislation that allowed four casinos in our state in 2009.  The initiative was passed by voters.

The house always wins.

We also have a robust lottery that allocates millions of dollars to schools and public projects.  My chances of winning the lottery jackpot in Ohio?  1 in 13,983,816.

The argument that equity crowdfunding is too risky for the average investor is a bogus narrative.  There are legitimate, well-founded concerns regarding transparency, conflict of interest and investor education that should be addressed.  Some of these concerns are responsible for the delays in implementation of the JOBS act.  They will be addressed, and not all by regulation.  Market forces are already beginning to play a role in creating demand for investor services in the crowdfunding space.  (Hello!)  However, if we allow the average consumer to stop at a gas station and gamble away as much of their money as they please on a one-in-many chance at a return, why stop that same individual from investing a small amount of their hard-earned money in an American company with an obvious, implicit motivation to succeed?

US citizens interested in equity crowdfunding should and will have tools at their disposal to make educated, pragmatic decisions on which companies to invest in.  First and foremost, the portals themselves will have every reason to provide assurances regarding the quality of their offerings if they wish to avoid incurring the wrath of a watchful press.  We’ve already seen that with Kickstarter’s emphatic “We Are Not A Store” moment.  Kickstarter reemphasized their risks in a very transparent way, but for any well-studied crowdfunder this was obvious anyway.

Secondly, access to the founders of crowdfunded startups is remarkably easy to come by.  Most rewards-based portals have a means of communicating with project founders, whether that be via in-house message/comment boards, direct email or phone communication or a link to an external web site.  Investors can study who these people are, what they’ve done and even where they’ve failed before.  If the information isn’t there, personal responsibility needs to kick in and the investor needs to decide whether or not they’re open to that level of risk exposure, just like I do when I pass on that lottery ticket at the convenience store.

In short, consider who we’re really trying to protect here.  Do we sell American investors short by saying they aren’t smart enough to make an educated decision with their money?

The casino is open 24 hours.

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