By Anthony J. Alfidi, Crowdfunding is in full bloom. Portals are springing up all over the gall-dang place. Startups are drafting pitch decks and sticking them willy-nilly on these portals with nary a thought about the audience that can now reach them. Here’s how the average amateur investor can get in trouble.
One guru at a tech conference last year openly wondered why amateur real estate investors are allowed to make poor home investing decisions but have been prohibited from seeking risk in startup investments. I won’t name this dude but I think of his diatribe more often now that crowdfunding portals are filling my inbox with startup pitches. The difference between buying a house and buying into a startup has usually been about the due diligence banks put into a home loan application. Home buyers must prove that their income, net worth, and credit history are sufficient to meet the bank’s loan risk criteria. Startup investors in a massively decentralized investing landscape never had to prove any of those things prior to the crowdfunding revolution.
Laws and SEC regulations growing around crowdfunding are bringing further specificity to crowdfunding investors’ eligibility requirements. The regulatory climate needs to be tight before large commercial banks start buying crowdfunding portals to expand their retail investment offerings. Someone’s grandparent is bound to log into their bank account someday and see a tab for “crowdfunding.” Clicking on that tab and viewing a bunch of slide decks promising 30x returns may look too good to pass up for someone who doesn’t know that most startups fail. Your grandma and grandpa are used to watching their savings grow. They’re going to blow a whole lot of dough on failed startups if the finance sector doesn’t get the controls in place now.
Amateur investors can be pretty dumb sometimes. Creditworthiness matters in real estate and competence should matter in startup investing. Crowdfunding can hurt a lot of people who won’t know any better. Regulations requiring proof of assetshttp://alfidicapitalblog.blogspot.com/2014/05/amateur-investors-may-go-nuts-with.html protect investors from their own tendency to overestimate their competence.