Crowdfunding Opponents: Not Everybody Trusts the Wisdom of Crowds

There are so many voices cheering for crowdfunding that it might seem like everybody is for it. After all, everyone from the President and venture capitalists to college students and veterans all support crowdfunding. Even the diametrically opposed Congress actually created and passed the JOBS Act in a rare show of bipartisan support. Everybody loves crowdfunding, right? Everybody wants the SEC to finalize the rules for equity crowdfunding as soon as possible, right?

Wrong. Though we might not hear about crowdfunding opponents as often as we hear from supporters, opponents do exist.

Crowdfunding Opponents in Washington

Tennessee Representative Steve Cohen sent out an email on Sept 13th to a large swathe of Republican peers asking them to back his new “Protect Investors from Crowdfunding” bill. In Cohen’s words, “Even if regulators do everything right in terms of imposing appropriate investor protections, most of those who invest through crowdfunding sites are likely to lose some or all of their money. At worst, crowdfunding web sites could become the new turbo-charged pump-and-dump boiler room operations of the Internet age.”

Opponents on Wall Street

The opposition is not just political or limited to Washington. Some Wall Street insiders seek to break up the crowd, too. The North American Securities Administrators Association (NASAA) listed crowdfunding as one of the top four new investor traps of 2012. A blog post on the NASAA site titled, “Laws Provide Con Artists with Personal Economic Growth Plan” said the JOBS Act “could unwittingly open a floodgate of fraud”.

The Wisdom of Crowds

While there are legitimate reasons to be cautious about how crowdfunding law is defined, none of the opponents to crowdfunding specify how the fraud would take place. Opponents usually argue that shady entrepreneurs could buy advertising and television commercials to create false claims about the ventures they are trying to fund.

But that assumes no intervention from the SEC at all. It also profoundly misunderstands the very nature of crowdfunding: that it takes a crowd of supporters. Crowdfunding is all about information sharing. Crowdfunding communities have also proven they can sniff out fraud very quickly.

Funding Portals as a Fraud Stopgap

Even if you don’t trust the crowd to police itself, trust the gatekeepers. The JOBS Act requires registered crowdfunding issuers, or “funding portals“. These entities would be the crowdfunding platforms and where investing would happen. If these entities could be shut down for fraud, it means they will be supervising whoever uses their services very closely.

No Fraud on Wall Street?

It is also hard to not comment on the underlying assumption of the crowdfunding opponents: that existing equity offerings are not fraudulent. Granted, the vast majority of stocks are not fraudulent, but every few months another darling of Wall Street is exposed.

Neither the investor nor the consumer is rigorously protected by fraud anymore. If they were, PayDay loans and spending on lottery tickets would be more curtailed. For example, poor people spend 9% of their income on lottery tickets, yet no government entity has ever decided to do anything about that.

No Fraud Yet

Another source of support is that equity crowdfunding has been happening in Europe for more than two years. Not one case of fraud has occurred. While this does not mean fraud cannot happen, it should demonstrate that equity crowdfunding is not generating any more fraud than any other financial instrument.

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