Crowdfunding is the future. One way or another, a crowdfunding bill –whether the current bill, or a wholly separate bill – will make its way through Congress, lowering the hurdles non-accredited investors face when investing in non-public businesses.
While many businesses will continue to use typical SEC exemptions – Reg A or Reg D (Rules 504, 505 and 506) – crowdfunding opens up investment opportunities to the non-accredited masses who seek alternatives to savings accounts and the public markets.
While legions of business owners applaud crowdfunding and the opportunity it presents, particularly in light of limited business credit availability across the board, there are many critics who claim that lessening SEC restrictions will invite and encourage fraud.
Such critics ignore the obvious: investment fraud is already widespread, and the defenses against fraud with any new crowdfunding legislation are the same defenses that prevent fraud now – namely – due diligence and common sense.
One only needs to open their spam folder to find hundreds of investment opportunities for the taking, all of which are fraudulent. Despite obvious fraudulent qualities, there are always unsuspecting people who mistake a crooked deal with the deal of a lifetime. This is nothing new.
PT Barnum is famously credited (The problem too, is that a schemer will attempt securities fraud with or without new legislation. Easing the burdens for businesses to raise capital from non-accredited investors will not turn otherwise upstanding citizens into crooks. Rather, crooks will be crooks, and instead of targeting your spam inbox, they might create a bad, crooked and fraudulent crowdfunding website. Investors must be vigilant in their due diligence review, and use common sense when choosing the businesses with which to invest.
How are these basics, due diligence and common sense, different from the tools of investing today? Obvious answer – they are no different – due diligence and common sense rule the day as they have for hundreds if not thousands of years.
Easy rules of thumb (by no means is this an exhaustive list):
1. Only invest through quality and trustworthy brokers or exchanges;
2. Always utilize an attorney when examining private placement memoranda (PPMs) and other investment documents;
3. If it sounds too good to be true, it is.
Nothing groundbreaking, just the same protections as always, and the advice your parents likely gave you as a kid (save for the hiring of counsel for a PPM part).
Postscript:
Steve Bradford wrote a nice piece whereby he essentially posits that the benefits of crowdfunding outweigh the negatives – read it here.
Kevin Lawton also wrote a great blog post about the benefits of crowdfunding, arguing from a somewhat different angle that fraud is the bogeyman of the legislation - read it here.