Crowdfunding: The American Dream Reloaded
Ever since the JOBs Act was signed into law there have been lots of stories about how bad it will be next year when it’s finally legal to do so. I think it’s time we all took a deep breath and look at this for what is was intended to do.
According to the SBA, each year more than 10 million people consider starting a business. Out of this group, only three million take the plunge and actually start a business. It’s one of the most exciting endeavors that any person can undertake and it empowers people to take control of their own destiny and not wait for corporate America or the government to give them a job. Will they succeed? Who knows. But their level of success or failure holds true no matter where they get their funding from.
Americans have historically been interested in supporting and investing in innovation, creativity, passion and hard work, (entrepreneurs) and have always been willing to chance a small amount of money to experience the excitement of being involved in a deserving Startup, to support them and watch them grow.
While Americans currently continue to have trillions of dollars sitting on the sidelines, countless brilliant ideas, technology, research and innovation have been squandered for lack of access to capital. This causes negative ongoing consequences for our health and our economy. As a result we experience huge losses in revenue and job creation as well as a national crisis we are paying for now more than any other generation ever has.
We need to encourage investment in entrepreneurship and innovation in every way possible and provide a fast track system to launch viable new ventures -which equity crowdfund investing can do. Even if some people lose their money, it’s no greater risk than every other investment people make. It’s still a gamble and the risk must be managed rather than avoided. Promoting fear around crowdfunding will not help us in creating jobs or in taking the necessary steps to create a new frontier so we can continue being the most innovative entrepreneurial society in the world that has capitulated us to this amazing place over the past century, allowing us to make these trillions of dollars in the first place.
It can be argued that the ambition and innovation of our entrepreneurs are keys to rebuilding the nation’s economy. With more than millions of Americans still unemployed and vying for a scarce number of jobs, entrepreneurship is the crucial means for growing our economy — locally and nationally. It’s one thing to believe in “the American dream,” the challenge is to fund and facilitate it in the real economy, and we should do everything possible to support job creation.
Look at the reality.
During the dot com heydays there were millions of friends and family investors, and they were less protected than crowdfund investors will be next year. Did they all see a return on those investments? No, of course not, so how can we create different sets of expectations for success with crowdfund investing than for every other investment/gamble we take in life, especially when whatever precautions we take, it will never insure or guarantee the fate of an investment anyway?
Look at the restaurant business for example, with its 80% failure rate. Do people stop investing in them? No, in fact people love to invest in restaurants. They understand the risk and are willing to take it because if their investment turns out to be one of the 20% that succeed they could own a piece of SPAGO or ownership in a company as successful as Starbucks. Are they stupid for investing in them or are they exercising their free will with their own money to take the risk? We can’t start off overestimating what people should expect from a crowdfund investment and assume that these investments will return any better odds than Startups or small businesses have ever returned in the past. The reality is; life is a gamble and we all unwittingly take a loss in every kind of investment in life, especially ones we didn’t put our own money into, like oil, healthcare costs, banks and other bailouts, for example. When those companies that control the necessities we all depend on for our survival make bad decisions and/or fail and go bankrupt we all pay a big price and take a loss. Where are the safeguards and protections for that?
How Crowdfund Investing will be different
When a person registers to invest on a funding portal or with a broker they will have to certify that they understand the risk they are taking long before they ever put one dime into crowdfunding.
Here is the language directly from the bill:
‘‘(A) reviews investor-education information, in accordance with standards established by the Commission, by rule;
‘‘(B) positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and
‘‘(C) answers questions demonstrating— ‘‘(i) an understanding of the level of risk generally applicable to investments in Startups, emerging businesses, and small issuers; ‘‘(ii) an understanding of the risk of liquidity; and (iii) an understanding of such other matters as the Commission determines appropriate, by rule…
The bill also requires that companies must file with the SEC, the Intermediary (aka funding portal), and all potential investors a complete and accurate disclosure document that will include at a minimum the following information:
Registration & Incorporation in the U.S. Name, legal status, address, website, etc. Names of directors, officers, and 20% stockholders. A description of the business and the anticipated business plan of the issuer. Also prior year tax returns and financial statements. Descriptions of intended use of raised capital & proceeds, target offering amount, deadline, and regular progress updates through the life of the offering. Share price and methodology for determining the price. A description of the ownership and capital structure of the issuer, including a lot of detail about the terms of the securities being sold, The terms of any other outstanding securities of the company, including a summary of the differences between them, and such other information as the Commission may, by rule, prescribe, for the protection of investors and in the public interest.
So, clearly investors are well protected by that process and if they are responsible and care about what kind of business they are investing in, and not blindly following the crowd, but peform their due diligence, read the business plan and have a complete understanding of what they are investing in, (before they put their money into the investment). Serious and responsible companies will emerge creating a lot of new jobs and lots of people will win.
Let’s not stamp out this new and exciting process of accessing capital for those that will be successful and create the jobs our country needs just because it comes with the same risk that every other investment does, of losing it all. Let’s start off crowdfunding next year by admitting that everything in life is a gamble, including Angel and VC investments, (which also fail to make a return more often than is assumed by the general public) and that at least with crowdfunding you have a direct say so in where your money is being invested. Also, if that business fails to provide a return on your investment which many will, at least you will have made that choice of your own free will and contributed to the greater good that entrepreneurial activity creates for our society at large and you can then think of it as a donation just like people do all over Kickstarter and RocketHub and other donation based crowdfunding websites.
So I say bring it on and:
Give us your fired, your under-funded start-ups, your huddled masses of innovative entrepreneurs yearning for access to capital. The wretched refuse of your economically broken shores. Send us the Twitters, the LinkedIn and Facebook tempest-tossed pioneers fighting to claim their piece of the American dream and let them stake a claim and crowdfund invest their innovative ideas, so we can all walk through the golden door. -Ruth E. Hedges (with help from Emma Lazarus)
Ruth Hedges, CEO www.crowdfundingroadmap.com
About Ruth Hedges
Ruth Hedges is the CEO of Funding Roadmap and Crowdfundingroadmap
