Last month I wrote an article about how a fund of funds may help some investors participate in crowdfunding. Interested in additional perspective on the idea, I reached out to Sherwood Neiss of Crowdfund Capital Advisors for his take. His response was as follows:
(f) Applicability- Section 4(6) shall not apply to transactions involving the offer or sale of securities by any issuer that–
(1) is not organized under and subject to the laws of a State or territory of the United States or the District of Columbia;
(2) is subject to the requirement to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934;
(3) is an investment company, as defined in section 3 of the Investment Company Act of 1940, or is excluded from the definition of investment company by section 3(b) or section 3(c) of that Act; or
(4) the Commission, by rule or regulation, determines appropriate.
It would seem, based on the bill, that Crowdfund Investing is only applicable to businesses and not investment companies. This would be contextually correct since the intent of the bill is to allow individuals to make personal, active investment decisions into a business or individual they know, trust and believe in. The way in which crowdfund investing (CFI) works is by leveraging both the social network and the wisdom of the crowd. It is more than pooling dollars but pooling knowledge and experience of people who wish to have a vested interest in a community business and also help the company (aka their investment) succeed by being marketing agents. Having an investment company do that (although not a bad idea) is pretty much the way things currently operate in venture funds. I wouldn’t say there isn’t room for such a fund in the future however as you can see by point 4 above, this is up to the SEC.
His response outlines an important reality of this type of crowdfunding, and one that I deliberately ignored in my thesis. The architects of equity crowdfunding realize that in order for companies to succeed, said companies and their backers need to work together. Backers with a vested interest in the success of these companies instantly become advocates of their entrepreneurial and economic success. They’ll be patrons, they’ll be critics and they’ll help guide these companies as they navigate their markets. That very well may end up being one the most powerful aspect of crowdfunding under the JOBS act.
I stand by the thought that a fund of funds may increase participation and capital, but perhaps the most important question is whether or not it does anything to perpetuate the success of existing businesses and entrepreneurs. During crowdfundings formative stage, this will remain an unknown.