As the SEC starts to shore up the rules around crowdfunding, some people are worried that it is too small scale to make a difference in the market, while others worry that it will open first-time investors up to fraud. According to Bailey McCann, the new fundraising tool has an important role to play in the current low-liquidity environment.
Crowdfunding is still relatively new, the product of a regulatory exemption created by the JOBS Act (Jumpstart Our Business Startups). The Securities and Exchange Commission hasn’t shown any particular enthusiasm for the investment vehicle, but is slowly getting around to dealing with laying down rules. Concerns about fraud has drawn criticism to crowdsourcing from two different angles. “It’s the new money that tends to overpay in transactions, that’s what concerns us about crowdfunding,” says Sensiba San Filippo Managing Partner John Sensiba.
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Crowdfunding opened a lot of new investors up to unscrupulous practices
Of course plenty of people told congress that crowdfunding opened a lot of new investors up to unscrupulous practices—if not outright fraud—so the Senate put restrictions on how much any one person could invest this way: 10 percent of income for people earning six digits or more, and 5 percent of income for everyone who earns less. There’s also a total limit on the amount that any company can raise this way – one million dollars per year.
Crowdfunding is simply a non-starter in many industries
Restricting individual contributions may be the right move to protect consumers, but it makes crowdfunding harder to do. Restricting the total amount raised to such a low amount means that crowdfunding is simply a non-starter in many industries. Ironically, the social networked IT sector that should be the natural leader for something like this probably won’t be terribly interested considering the cap.
Crowdfunding may be a way for businesses to grow
But that doesn’t mean the whole thing is worthless. “As banks consolidate, and are required to keep more cash on hand, providing small lines of riskier credit rubs up against new regulations,” says McCann. “There are some businesses that may be sound, but aren’t going to fit the mold for alternative investment firms…crowdfunding may be a way for businesses to grow into something that is a better fit for investment firms.”
So maybe people comparing crowdfunding to IPOs have the wrong idea. Instead of seeing it as directly competing with traditional vehicles, maybe it’s the equivalent of training wheels, giving smaller companies a way to bring in capital even if they’re not quite ready for a Regulation A+ IPO.