Do agree that crowdfunding should be left to regulate itself?

posted Sep 11, 2012, 3:22 PM by David Khorram

Crowdfunding, which pools small donations from large amounts of investors, continues to make large, sweeping global inroads. From a donation site supporting the arts to a value-for-value trade to a platform that investors use to find a return on their investment, crowdfunding is becoming a highly sophisticated and radical game-changer. But as it moves towards a business model that attracts more traditional investors, risk also increases.

In the United States, however, there has been some foot dragging when it comes to the specific rules governing certain types of crowdfunding. The Jumpstart Our Business Startups Act of 2012 gives the Securities and Exchange Comission until next year at the earliest (does it really need to take that long?) to establish those rules. Rather than speed up this ridiculous bureaucratic timetable during the most trying economic times since the Great Depression, the SEC has muddied the process by disputing who qualifies as an “accredited investor.”

At the end of August, the North American Securities Administrators Association  ( NASAA ) identified “Crowdfunding and Internet Offers” as a top emerging investor threat.

“So, the JOBS Act provisions related to crowdfunding, a much-publicized method for startups seeking capital, are not yet available – and will not be until sometime in 2013 – to legitimate businesses,” says the NASAA. “Even when the relaxed rules and registration exemptions are effective, they will not make investments in small businesses less risky – just more prevalent. And the JOBS Act provisions do not eliminate fraud, an unfortunate common feature of Internet securities activity.”

That’s more than a little extreme. While it is the mandate of any administration to protect the consumer as well as the investor from lurking predators, there aren’t reams of cases of crowdfunding fraud that would necessitate this level of caution. As these young social media platforms transform the trajectories of capital flow, time is of the essence.

Organizations like the Crowdfunding Professional Association have arisen, ad hoc, pointedly challenging the growing skepticis expressed in that NASAA tract. Social media, the CPA argues, is a natural disinfectant to crowdfunding fraud, and should be built into security law.

“The trouble with the NASAA assessment of crowdfunding fraud is two-fold,” wrote Jason Bess and Sherwood Neiss, two of the most vocal critics of crowdfunding skepticism. “One, they used a gaming company as an example that was caught two years ago (long before crowdfunding legislation was created) and prosecuted in August. Two, they failed to mention that this so called ‘crowdfunding’ company was funded under the old securities laws (pre-JOBS Act), which makes fraud easier to commit as they keep investments out of the public light, allowing for backroom deals and billions in losses by average American.”

While the U.S. continues to impede the growth of crowdfunding, the platforms are showing signs of maturity overseas. New Zealand-based PledgeMe has raised more than $400,000 across 75 projects. Anna Guenther, the site’s founder, says their momentum is growing ,”week to week.” Those numbers, when compared to KickStarter—which has raised over $250 million over three years across 24,000 projects—may seem small, but crowdfunding platforms have to begin somewhere.

Portugal’s first crowdfunding company, PPL, is taking up some of the slack as public and private monies for the arts dry up in the cash-strapped country. And in Latin America—Buenos Aires-based Ideame’s acquisition of Brazil-based Movere comes to mind—we are beginning to see consolidation among some of the big players.

Finally, crowdfunding is not limited to terrestrial ambitions. Beyond international expansion, space elevators ($61,604 from 2,015 backers on Kickstarter) and the for-profit space education company, Uwingu (over $30,000 on IndieGogo so far), are among the many ambitious and cosmically minded projects looking for funding.

And yet in the United States, a certain amount of uncertainty looms. Bess and Sherwood argue that the best role of government in regulating crowdfunding is the least amount of interference.

“The crowdfunding industry’s experience with other government entities (including its active engagement with the SEC) has demonstrated that when the crowdfunding industry is able to engage in an open dialogue, the facts of crowdfunding tend to outweigh the vague fear, uncertainty, and doubt that are put forward by people who may be unfamiliar with the mechanics of the social Web.”

An interesting argument for self regulation of a social media platform with unlimited potential.

At home, abroad, and galactically, it seems like the future is bright for crowdfunding if the government does best, in this particular sector, and governs least.
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