CrowdFunding Good for Investors?

 

Photograph by Robert Schlesinger/DPA/AP.

Photograph by Robert Schlesinger/DPA/AP.

BY TIMOTHY SPANGLER, 

Last week, the Securities and Exchange Commission set new rules for people seeking to use online platforms to raise money for their companies. Soon, some startups could start raising funds not from venture-capital firms or wealthy individuals, but from the general public. Think Kickstarter, the Web site that helps artists raise donations to fund their work, but for businesses. It’s part of the JOBS (Jumpstart Our Business Startups) Act, signed by President Obama in April of 2012, and the goal is to spur economic growth.

There will be several limits to protect investors. People who earn less than a hundred thousand dollars a year can invest only up to five thousand dollars a year, while those who make more face a cap equal to ten per cent of their annual earnings. Companies can raise no more than a million dollars in any given year, and must share some financial information with investors. Crowdfunding intermediaries—like the Kickstarter-style Web sites that hope to help startups raise money from the public—are required to keep an eye out for fraud.

Critics have argued, however, that fraud will be easy. People will mislead would-be investors by misrepresenting the prospects of the target company. Luis Aguilar, an S.E.C. commissioner, last week <href=”#.unflm6vm_0v”>acknowledged the prospect of fraud. “Commenters, including state securities regulators, have noted that small business investments may pose relatively high risks of fraud,” he said. He added, “Many of the S.E.C.’s enforcement cases arise from ‘affinity frauds’ that exploit the trust and friendship that often exists among members of any ethnic, religious, or other community.” Crowdfunding, which could make it easier for people to raise money from their own social networks using online services, could facilitate this sort of fraud, Aguilar said.

There’s another problem that has gotten less attention, but is likely to be much more common:most startups fail. As a result, much of the money given to these companies ends up being lost. Traditional startup investors—the wealthy angel investors and venture-capital firms that typically fund young companies—are aware of this; they invest in many companies, with the hope thatsome small portion succeed. About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School, cited in a September article in the Wall Street Journal.

This is especially problematic when you consider that the companies most primed for success may be most likely to take a traditional route to raise funds. Traditional investors, like venture capitalists, can be a pain in the neck: they may ask you to change your business plan, overhaul your board of directors, fire your C.E.O. But they also come with perks, like connections to other influential business people. Why spend weeks or months hustling to convince five thousand people to give you a hundred dollars apiece, if a single one of these wealthy investors is prepared to write you a check for half a million dollars?

Source and more on:http://www.newyorker.com/online/blogs/currency/2013/10/is-crowdfunding-good-for-investors.html

 

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

NPRAfter Outcry, Crowdfunding Site Patreon Backs Off Plan To Raise ...NPRThe popular crowdfunding service Patreon has backed off plans to change its payment structure, after widespread, vocal and passionate opposition from creators and their fans. Last week, the site announced it woul [...]

EntrepreneurWhy Some Small Business Owners Are Turning to Crowdfunding to Save Their CompanyEntrepreneurMany owners of beloved local businesses, especially in pricier cities, have been forced to swallow their pride and appeal to their customers in times of crisis -- a process streamli [...]

TechCrunchHow hate speech crowdfunding outfit Hatreon crept back online ...TechCrunchIf you want to make a living creating white supremacist content, you're probably not going to do it via sites like Kickstarter and Patreon, which prohibit hate speech. Fortunately there's Ha [...]

Crowdfunding bid to cut car cover for millennialsThe TimesAn insurance start-up that claims it can reduce premiums for millennials will launch a £15m initial coin offering (ICO) next month in another sign of the growing frenzy over digital currencies. InsurePal will use the funds rais [...]

ForbesCrowdfunding Do's And Dont's From iFundWomen's Karen CahnForbesDuring our conversation, she was transparent in sharing that her first software company, VProud, failed because she “did everything backwards” and spent too much time trying to perfect the product. “Pe [...]

CoinDeskKickstarter ICO? Don't Count On It Says Crowdfunding Leader ...CoinDeskThe company most widely associated with crowdfunding, Brooklyn-based Kickstarter, has no plans to get into the initial coin offering (ICO) business. Coming in response to the news yesterday that compet [...]

TechCrunchFormer Gawker employees are crowdfunding an effort to buy Gawker.comTechCrunchWhile Univision acquired most of Gawker Media's sites last year (and renamed them as the Gizmodo Media Group), the deal didn't include Gawker itself. In fact, BuzzFeed reported last month [...]

Crowdfunding For French CastlesNPRYou too can own a French chateau, in part, anyway. Romain Delaume, CEO of Dartagnans, tells NPR's Scott Simon about a crowdfunding effort underway to preserve La Mothe-Chandeniers. SCOTT SIMON, HOST: What if I told you that for about $60, you cou [...]

CryptoCoinsNewsCrowdfunding Giant Indiegogo Looks to Make ICOs MainstreamCryptoCoinsNewsCrowdfunding platform Indiegogo has a plan to help initial coin offerings (ICOs) break into the mainstream, even as the U.S. Securities and Exchange Commission (SEC) is ramping up its oversight of [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |