In a recent blog posting on Crowdfundinginsider.com, the question is posed if the “Wheels have come off” the REG CF for Crowdfunding.
The article explores the political manoeuvring that went into the legislation and the “finger pointing” that has resulted with the dismal results so far. It is reported in this piece, that a paltry $24 Million has been raised in the United States last year for “Crowdfunding”. I really thought it might be a typo?! By the way, that amount represents 30,000 investments. That makes the average investment $800. Our tax dollars at work…great job guys.
REG CF was originally designed to assist the access for capital to meet the needs of start-ups and early growth firms. With the belief that there was not a level playing field for smaller investors, government inserted itself (something that we think government has no place to be involved) into the scenario. It also states the argument that if you weren’t physically located in places like Silicon valley, the hot-bed for tech start-ups…and a place where money “flowed like water”, that there was no chance for the people on the outside. Trust me; money only flows to where it makes sense these days, regardless of where you are located.
Before I weigh in, let me conclude the rest of the blog in question.
It notes that the legislation – which was only instituted in May of 2016 – has not lived up to the hype. In an effort to protect the investors from potential fraud, requiring verified accreditation of status and simultaneously requiring firms looking for crowd funding into a tsunami of disclosure and compliance, the government, in our opinion, has mandated failure before it started. For the unknowing, an Accredited investor is one who is either extremely liquid, a high earner, or a C-Level Executive within a firm. By the way, again in our experience, none of these requirements assures someone is savvy in investments.
Think about that for a second! An investor must prove with tax returns and the firm must verify that every accredited investor is actually accredited! Just thinking about that statement makes me think of the speculation within FOREX and in commodity markets shrinking to nothing.
The last item that was discussed was that legislators were relieved by the relatively low occurrence of fraud reported. Ha! Just wait a couple years, if it ever gets any traction!
Like the Edsel it was the Wrong product at the Wrong time
Let me say, especially post 2008, when funding for new firms went to nothing, there was an environment that needed oxygen. Instead it was met with aggressive and unrelenting regulation as a result of the mortgage and housing crisis. The results crept into every area of finance.
Here are our thoughts:
- The market is always efficient: if a project (firm looking for funding), or an investor is not geographically where the opportunity is; the market or the investor will overcome this. It is our opinion that savvy (and qualified) investors are always looking for opportunities. If they aren’t and are waiting for an opportunity to “drop into their lap” …then they are probably neither right nor qualified for the new firm, REGARDLESS of what their tax return says. Investors have an obligation that only they can achieve. They must be aware of the risks, they must educate themselves (on at least basic business), and they must remain diligent of their holdings. Like a farmer who has planted a crop, it must be tended to or failure is all but certain. This is not government’s role.
- More regulation does not help firms, especially new firms: Entrepreneurs, we have found, must have multiple skill sets. This is required of a great principal. There are not many GREAT CEO’s. A “good” one can get by until funding is available if he has a “winner” out of the box. Even the good CEO’s might not have the time to overcome burdensome regulation. Time for these new firms is a “wasting” asset. It’s usually a race as available initial funding dissipates.
- Designed to fail from the start: As stated before, firms must now verify if an investor is truly accredited. This will automatically reduce the number of investors in non-crowdfunding For crowdfunding and “Kickstarting” campaigns, the limit an investor can put in is based upon a net worth and income. In addition, restrictions in frequency of investment are in place. What happens when the firm hits these limits? Where are the next funds to come from? With limited time and limited “manpower”, it is likely the CEO is spending his time looking for the next funding source versus building the company.
- 2016 was yesterday: It was noted that regulators were happy by the low perceived rate of fraud…one of their greatest fears and rightly I will argue that this is still in the beginning innings, and the problems have not yet begun to show themselves from the success rates of firms to the loss of capital by investors (as well as complaints).
- Interacting with your investors: We have found that investors not only desire information, but thrive on it. This is whether the news is good or bad. We feel they are entitled to know as much as possible, relating to their investment.
How do you interact with 500 investors on any kind of meaningful basis when you are a new firm?
Again, as we have voiced so many times in other blogs, there is so much more to a successful firm than just a good idea. Yes, this is important and can cure a lot of other problems…but it’s just one component of management, marketing, funding, and strategy. Crowdfunding and Kick-start campaigns cater to only the idea, since usually nothing else is available.
So I will say yet once again; government stay out! You don’t know what you are doing. Your intentions are good, but you tie the hands of both the Entrepreneur and Investors. Are the wheels coming off the car? That car should have never left the garage.