There seems to exist in certain regulatory circles, particularly at the state level, a perception that Crowdfund Investing (CFI), when it comes on-line, will be rife with fraud. But this sky-is-falling mentality is unfounded and points to no structural or design problems with Title III and no data to support this conclusion. Contrary, the available data in markets where equity and debt crowdfunding currently exist (for example, Australia and the UK) supports the national imperative for crowdfunding and undermines their conclusion. The reason for this is that crowdfunding is based on one of the most powerful tools today for weeding out fraud, social media.
With the advent of the Internet, social media has gained prominence through websites like Facebook, Twitter, Google+ and LinkedIn. It allows anyone to share any information in a social network and allow others to comment on that information. Comments lead to further discussions and in many cases uncover nuances. It is one of the main reasons for the Arab Spring and successful political campaigns. Social media also drives consumer-buying patterns as people use it to rate products on Amazon.com and rate sellers on eBay.com. It allows individuals who cannot otherwise see each other to have a mechanism to develop trust while making buying decisions. This ‘circle of trust’ comes from the many-to-many interaction that takes place on these platforms.
This paper is meant to show how equity and debt crowdfunding, already in existence in other parts of the world has been operating fraud free for the past 7 years.
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