A new form of financing is coming to the financial markets: crowdsourcing.
Technically, crowdsourcing has to do with the way work gets done. When lots of people collaborate on small-to-medium sized tasks, that’s crowdsourcing. Wikipedia is an example of crowdsourcing: there’s no single editorial vision, and millions of authors contribute through thousands of editors to create the world’s largest encyclopedia. But when crowdsourcing meets finance, you get crowdfunding. And that’s where it gets interesting.
Crowdfunding is a way to fund a startup company, usually via the internet. It got a big boost when Congress passed the JOBS act, designed to ease the restrictions on selling shares in private companies. The SEC has yet to establish the rules for equity crowdfunding campaigns, but that hasn’t kept many enterprising folks from getting started.
Since I write about investments and I’m registered on a lot of websites, my email address has gotten around. So my inbox is now being bombarded daily with dozens of investment “opportunities”: everything to breakthrough drugs to Android apps to the next blockbuster film. Usually the source of the solicitation is somewhere in Eastern Europe or Southeast Asia, but increasingly these appeals are coming from California, Georgia, and anywhere else where unemployment is high.
Some of these requests almost sound plausible, if I take the time to read them. And that’s the problem. There are an infinite number of reasonable stories out there, and thousands and thousands of people who want your and my money. The JOBS act just removed a lot of investor protections that were put in place after the abuses of the 1980s’ penny stock “cold call cowboys.” Companies can now raise up to a million dollars without a lot of regulations. SEC rules are forthcoming, but the regulators are still overwhelmed trying to implement other new legislation.
Crowdfunding and crowdsourcing have their place, but not in my wallet. If you want me to show you my money, you better be able to show me your product—preferably with an experience management team and audited financials.
Douglas R. Tengdin, CFA
Chief Investment Officer
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