Yet another article by me on the dangers of crowdfunding… I am sorry, I just don’t get it!

With the announcement this past Wednesday, in regards to Obama’s JOBS Act, a unanimous approval in a vote by the U.S. Securities and Exchange Commission ushers the proposal into its next phase and includes some important measures that designers hope could help the smallest businesses find funding from a broader array of individuals.

All the excitement, ironically a lot of this optimism, is being generated by existing VCs within our business. This positioning, by VCs, I believe is to hold themselves out as forerunners in a new medium that isn’t even created yet. I believe, as you know, that crowdfunding will amount to nothing–and I mean nothing, but problems.

Why?

Let’s look at the proposals that they have given the public 90 days to review (so they can cover their own “you know what”):

Here are the highlights of what it entails:

• A company could raise up to $1 million for equity through crowd funding each year.
  • My view: Any business worth doing other than a mom and pop restaurant needs more than this. In addition; the time servicing these investors on questions, concerns, and relations will crush a new entity. Are these small investors going to live with a loss, if the firm doesn’t suceed?
• A company raising more than $500,000 must file more detailed information to the SEC.
  • My view: That includes virtually everyone. Is the SEC ready and manned for this? Is the business owner ready to deal with the SEC?
• A company must provide educational information to investors, insuring investors know what they are buying and understand their risks.
  • My view: Easier said than done.
• Investors with a net annual income of less than $100,000 would be permitted to invest up to only $2,000 or 5 percent of their annual income or net worth every year.
  • My view: No one ever tells the truth on their income. How will they verify?
• Investors with net income or annual income of more than $100,000 would be able to invest 10 percent of that every year.
  • My view: Will these people want to be treated with the same rights as the small investors?
• Securities would need to be purchased through online crowd funding portals–a new class created by the SEC.
  • My view: Monitored and approved; only good point suggested.
• Securities purchased through portals would have to be held a year before sold.
  • My view: What if the firm is acquired…just more regulation in a dysfunctional system.
• Firms raising more than $500,000 might have to get outside third-party audited financials.
  • My view: This is the most ridiculous thing I ever heard, as that would eat a huge slice of the money being raised.

Alex Mittal, the CEO and co-founder of crowd funding site Funders Club, says, “this is in no way game-changing for the future Facebooks or Googles of the tech world. There’s no point at which a million dollars would have moved the needle for Facebook or Google. They’re in specific, hyper-growth industries and to keep doing that it requires much more capital.”

I agree

SEC Commissioner, Michael S. Piwowar, seems optimistic that the proposal creates an “outside of the box” regulatory framework for crowd funding, while staying true to the SEC’s goal of protecting investors. He cited support from both President Barack Obama in opening up investor status to more people, and referenced the South by Southwest Interactive festival as a place where the crowdfunding discussion gained some clout last year.

He also attempted a crowd sourcing joke:  “I look forward to unleashing the ‘wisdom of the crowd’ on our crowd funding rule proposal to tell us what we got right, what we got wrong, and how we can improve it.”

Now I’ll give you one of my sayings, after 30 years in the financial markets: ”Bulls make money, Bears make money…and the public is always last in, first out and typically wrong.”

I rest my case, one last time.