The Jumpstart Our Business Startups (JOBS) Act has now been signed into law ushering in a new era of crowdfunding in the USA. Many reports have incorrectly declared that crowdfunding is now legal. In fact reward based crowdfunding has been both legal and popular in the US for some considerable time. What was not permissible was equity based crowdfunding. the JOBS Act now permits small companies to seek investment from non-accredited investors within certain constraints, so effectively permitting limited selling a share of the ownership of a firm in return for cash.
This is not unique. It has been continuing in other geographies for some time, with Crowdcube in the UK being one of the leading exponents. So what difference will it make?
Well, almost certainly we will see a burgeoning of interest and uptake in an entrepreneurial but capital-constrained market like the US and, they hope, the creation of jobs – hence the acronym.
More importantly, from a wider perspective, we can expect a general global surge in attention on crowdfunding which we believe can only be a good thing.
Almost certainly we will see some fraud and illegality, not because it’s in the US but because, as in all life, the scaling up of the activity will undoubtedly attract in some unsavory sorts who will see this as an opportunity to rip folks off one way or another. Naturally the opponents of “liberalising” security trading in the US who fought to derail the legislation will seize on any evidence of wrongdoing to bolster their case.
From my perspective evidence of wrongdoing in a minority of cases does not and will not challenge the correctness of the decision to pass the legislation. If evidence of exploitative, corrupt and criminal behaviour was applied as a measure of the legitimacy of any financial body pretty much all of them would be closed down. That’s not to say we shouldn’t condemn this when we come across it or put in place sensible precautions to prevent it.
But to roll back from the democratisation of capital would be a mistake and see the loss of an opportunity that in the majority will be wholly beneficial, legal and empowering.
Nevertheless it is noticeable that much of the opposition to JOBS came from the traditional and established finance communities. They raised the spectre of fraud, and often fall back on the condescending notion of “unsophisticated” investors being preyed on by snake oil salesmen. The implication being that this is a place for only “sophisticated” investors like themselves – a position that seems to bear little scrutiny given the recent performance of the self declared “master of the universe”.
But such attitudes don’t just persist in the US. I recently attended a fascinating event , dealing with crowdfunding and populated predominantly by representatives from the established financial community. Accountants, Banks, Insurance, Corporate lawyers, Angel groups and VCs for example. The overwhelming impression one got was that, on the whole, most didn’t understand the proposition of crowdfunding. Now this is not because they were foolish, dumb or arrogant – far from it. It seemed to be because using their established analytical frameworks and heuristics it simply made no sense. “No one with any sense would do this” seemed to be the subliminal message.
But, as we tried to explain, the nature of a social and networked environment that empowers people to re imagine themselves into new roles, in this case as investors, is that it brings in new ideas, new expectations of return, altered risk perceptions and novel approaches.
I can understand their confusion. I can understand the logic of their position, and I can see why this tends to express itself as either scorn or fear. No one likes their firmly held views challenged or feel under threat.
However our role must be to help these groups understand that this is not a threat to replace them. Crowdfunding will become another option for capital raising that is complementary to and not a replacement for traditional capital markets. It addresses a gap in both the demand and supply side and so as a financial community they must learn how this investment model fits with theirs. They must learn to understand new evaluation frameworks and what to them seem unusual expectations of return and investor behaviours.
None of us knows the outcome and the next few years will yield some interesting insights and developments. We firmly believe that this is here to stay and will expand and strengthen the financial community and the availability of capital to a wide variety of groups.
But for the sake of entrepreneurs and and looking towards the democratisation of capital I welcome and toast the arrival of equity based crowdfunding in the US.