April 15, 2012
I believe Crowdfunding is long overdue, however I have some concerns with using this method of raising capital in offerings that are exempt from registration. How are investors going to see an ROI or exit strategy?
In private offerings, sophisticated investors understand the risks. That's why in most cases VC's want a controlling stake in a Company they fund through such methods. In essence they are "buying" the entrepenuers "idea" and then financially seeing it through.
With crowdfunding, it is certain to attract mostly non-sophisticated investors. What happens when these investors have seen no ROI from thier investment? There will be plenty of great ideas to fund, but what if the management teams poorly manage the money given to them? What if these start-up's that raise capital through crowd funding need additional funding rounds to become profitable? Will current shareholders be willing to accept the dilution? Will these young start-up's be prepared to manage what could be some 500 shareholders? Some 500 angry shareholders if management isn't doing a good enough job. What happens when these angry shareholders then go online, on social media and express how they were "burned"? How will this help crowd funding grow?
As someone who provides investor relations to publicly traded OTC companies, I am very familar with the concerens and experience of the average unsophistcated investor. If ROI and exit startegy are not adequately addressed, I feel crowd funding could become a short lived experiment. These young start-up's are not only going to need to manage thier business, but they are going to need to manage shareholders and for those of us with experience in this area, it is not always an easy task.
I propose the SEC look at ways to offer an even simplified registration process. Maybe bring back the Small Business Registration format and offer simplified registered offerings. I believe the best solution is to provide an easier process of registering shares so that these companies can then seek qoutation on an OTC market. Then and only then will investors be given liquidity.
I believe lack of liquidity in these offerings will eventually lead to a negative stigma as there will surely be many Companies who raise money through crowd sourced means that fail to become profitable.
Please consider an alternative, simplified registration process so that Companies can utilize the already exisiting ability to conduct Direct Public Offerings so that they can become publicly traded companies as opposed to private Companies with large unsophisticated shareholder bases, which is surely a recepie for disaster in many cases.