Why Equity Crowdfunding Naysayers are Dead Wrong

For Companies General May 27, 2016

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Why Equity Crowdfunding Naysayers are Dead Wrong

When you read some of the press regarding the new equity crowdfunding rules, you may think that equity crowdfunding is rife with charlatans, ripoffs and opportunities to lose money. However, many of these articles are written by lawyers whose job is to identify and focus on risks; others are written by venture capitalists and super-angel financiers who only have a vested interest in protecting their turf and enhancing their ability to maintain complete control over investments.

From this perspective, it is understandable why there would be many equity crowdfunding naysayers out there.

The Reality: Explaining Equity Crowdfunding to My 19 Year Old Son

My son once asked me, ‘why are there so many people and politicians opposed to equity crowdfunding under the new SEC rules?’ I gave him a simple answer; there is concern that elderly people and impoverished people will lose their spending money and perhaps their retirement savings as well.

My son asked, ‘do elderly people frequently go on the Internet to make investments, I replied ‘no.’

Then he asked,‘do impoverished people go on the Internet to make investments?’ I once again replied, ‘no.’

‘I don’t understand what the problem is.’

Reducing Risk: Investment Limits and Diversification

While investing carries risk, there are several limitations as well as thoughtful approaches that can help enhance returns and reduce risk. Rules from the JOBS Act published by the SEC set limits on how much both accredited and non-accredited investors can invest in each individual equity crowdfunding raise.

The investment limits for offerings conducted under Title III Regulation Crowdfunding rules are stricter than those for Title IV Reg A+ offerings, which require issuers to file extensive disclosures with the SEC concerning their business operations. The rules for accredited and non-accredited investors in these offerings are as follows:

Regulation Crowdfunding (Title III): an unaccredited investor, those whose annual income or net worth is less than $100,000, can only invest a maximum of 5%. For those with an annual income or net worth greater than $100,000, he/she is limited to investing 10% of that amount. There are no restrictions for accredited investors.

Regulation A+ (Title IV): an unaccredited investor can only invest a maximum of 10% of their annual income or 10% of their net worth per year, whichever is greater. There are no restrictions for accredited investors.

Another key factor in reducing risk is diversification. As with traditional stock and bond investing, it is prudent to diversify your investments across a larger number of small investments rather than concentrating them in one or two opportunities. Crowdfunding is no different in this regard.

Equity Crowdfunding in the U.S and Australia and the Wisdom of the Crowd

There are many who have claimed that equity crowdfunding will be rife with frauds whose intentions are to unethically or unlawfully take advantage of the new rules. However, there has not been any empirical evidence showing a large number of fraud or theft related incidents from both rewards based or equity based crowdfunding.

This is true both in the U.S. and in Australia, where crowdfunding has been in place for over 10 years. The claims of widespread fraud have thus far been mere speculation and conjecture with no evidentiary support.

Equity crowdfunding has its roots in “the wisdom of the crowd.” It has been demonstrated through a number of studies that a larger group of less experienced people will come up with more accurate conclusions than a smaller group of highly experienced people. This phenomenon, in part, underlies Congress’ intent in creating rules to enable equity crowdfunding.

The practice of portfolio diversification, in conjunction with the rules established by Congress and the SEC to guide the implementation of equity crowdfunding, position this new funding mechanism as a viable option for investors interested in the new opportunities it can bring to the table.

The views and opinions expressed in this article are those of author Ron Miller. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:https://www.startengine.com/assets/Disclaimer.pdf

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