Why regulators are dead wrong about crowdfunding and risk

The crowdfunding news mill has been rife with warnings and doom-saying lately from all corners of the globe.

Equity crowdfunding is a gamble, no doubt. Startups eagerly wait on the sidelines while regulators and advocacy groups wring their hands over the final details of the JOBS Act.

After all, once the JOBS Act becomes law and crowdfunding for equity becomes legal in the United States, startups will be participating, and startups fail at a high rate.

So the SEC has set up rodfunding roadblocks, the the North American Securities Administrators Association (NASAA) blasted crowdfunding as a huge danger, and the SEC has proposed limiting equity crowdfunding to accredited investors only — basically neutering the whole idea of crowdfunding in the first place.

All this has happened because regulatory bodies (correctly) perceive equity investment in startups as risky behavior.

However, gambling is legal in parts of the United States and has seen expansion recently thanks to promises of increased tax revenue for participating states. I’m based in Ohio and have personally witnessed implementation of new legislation that allowed four casinos in our state in 2009. The initiative was passed by voters.

We also have a robust lottery that allocates millions of dollars to schools and public projects. My chances of winning the lottery jackpot in Ohio? 1 in 13,983,816.

The house always wins.

The argument that equity crowdfunding is too risky for the average investor is a bogus narrative. There are legitimate, well-founded concerns regarding transparency, conflict of interest and investor education that should be addressed. Some of these concerns are responsible for the delays in implementation of the JOBS act. They will be addressed, and not all by regulation.

Market forces are already beginning to play a role in creating demand for investor services in the crowdfunding space. Still, if we allow the average consumer to stop at a gas station and gamble away as much of their money as they please on a one-in-many chance at a return, why stop that same individual from investing a small amount of their hard-earned money in an American company with an obvious, implicit motivation to succeed?

U.S. citizens interested in equity crowdfunding should and will have tools at their disposal to make educated, pragmatic decisions on which companies to invest in. First and foremost, the portals themselves will have every reason to provide assurances regarding the quality of their offerings if they wish to avoid incurring the wrath of a watchful press.

We’ve already seen that with Kickstarter’s emphatic “we are not a store” moment. Kickstarter reemphasized their risks in a very transparent way, but for any well-studied crowdfunder, this was obvious anyway.

Second, access to the founders of crowdfunded startups is remarkably easy to come by. Most rewards-based portals have a means of communicating with project founders, whether that be via in-house message/comment boards, direct email, or phone communication or a link to an external web site. Investors can study who these people are, what they’ve done, and even where they’ve failed before.

If the information isn’t there, personal responsibility needs to kick in, and the investor needs to decide whether or not they’re open to that level of risk exposure, just like I do when I pass on that lottery ticket at the convenience store.

In short, consider who we’re really trying to protect here. Do we sell American investors short by saying they aren’t smart enough to make an educated decision with their money?

The casino is open 24 hours.

Charles Luzar is the Director of Crowded Media Group and CrowdfundInsider.com, a news blog dedicated to crowdfunding in the United States and around the world. Crowdfund Insider is helping to bring a global perspective to crowdfunding in advance of the JOBS Act becoming law in 2013.

Top image courtesy of Kraevski Vitaly, Shutterstock