Will Crowdfunding Really Attract Crowds?

It was and is supposed to be the great “playing field leveler” – crowdfunding for the masses was made possible by the Jumpstart Our Business Startups Act, which was passed three years ago.  With the various permutations of new rules that have finally been agreed upon by regulatory bodies, the question that seems to have no clear answer is: Will crowdfunding take off once it is available for just about everyone once May of 2016 rolls around?

The short answer — as is so often the case with nascent technologies and/or markets in search of early adopters (like mass-consumption crowdfunding) — is: It depends. It depends on whether people feel comfortable enough with the idea of bringing their investment dollars to carve out an infinitesimal part of a new company that may or may not ever show returns on investment, or go public, or be sold for a tidy sum. 

One cautionary exegesis of the rules that are in place to open the gates for democratic fundraising across the equity space, according to The Wall Street Journal: the JOBS Act language has enough stipulations in it to render wider-access crowdfunding a “nonstarter” for getting tech outfits off the ground (and thus bring riches to mom and pop).

The WSJ noted that the Securities and Exchange Commission has created a set of rules, gathered together in what is known as a 12g rule, that in effect acts as a “powerful disincentive” for high-growth companies, the very ones that would excite small investors, to use what is officially known as: regulated crowdfunding.

Why? Well, for starters, 12g mandates that a company that truly gets a crowd – OK, not really, in fact, anything more than 500 individual investors – or gets a critical mass of investments above a $25 million threshold (hardly a huge number should the momentum and excitement be there), then it’s time to start filing regular disclosures akin to those that must be done by any publicly traded firm. As the WSJ reports, “it is all the pain of an IPO without the benefits of the IPO.”

Parsing that statement just bit, the implication is that companies are not going to want to slog through the minutiae and “open kimono” nature of SEC filings that take time, incur expenses and may even deter the secretive VC and PE capitalists with far deeper pockets than the individual investor may have. Add to that the fact that individual investors are somewhat hobbled by crowdfunding rules, too – they can only put up $2,000 or 5 percent of net worth or net income, whichever is less into the crowdfunding pot. Suddenly it seems that the great investment equalizer is the great, well, hype.    

There may be a loophole, posits The WSJ, quoting a startup founder, Nicholas Tommarello, of Wefunder. With a broker dealer in place, holding all of the startups/securities that would be funded across a platform such as Wefunder’s, a single shareholder can indeed expand reach across a variety of startups. It remains to be seen whether that strategy is a viable one.    

In addition, as The WSJ states, the route to equity crowdfunding may be one taken by higher risk and poorer quality companies, with no other alternative. That is a way to ensure investor dissatisfaction, and perhaps short circuit crowdfunding before it ever truly gains currency.