Subject: File No. S7-09-13
From: David M Cromwell
Affiliation: Yale School of Management, Adjunct Professor of Entrepreneurship

October 27, 2013

The Crowd Funding concept is not going to work. Small investors will lose all their money most of the time, not many extra new ventures will start up and succeed, and only a few new jobs will be created on a sustained basis.

Authors of the legislation clearly do not understand successful venture capital investing and the key success factor. The key consideration is the management ability of management team behind the idea, not the idea itself. Can the founders / entrepreneurs make the idea happen, can they execute the business plan? This is a tough decision to make and requires a lot of exposure to the management team.

Incompetent management causes more failures in new business ventures than all of the other reasons, combined. Read any good textbook on venture capital investment or talk to some real VC firms -- almost all of them will say exactly the same thing.

As an venture investor, you cannot judge the abilities of the management team over the Internet. Real venture capitalists do not make their investments over the Internet -- they spend hours and hours interviewing the founders / management team, in person. Small investors cannot successfully invest over the Internet, either.

A better way to allow small investors to pool their money and invest in new ventures would be to allow the creation of special closed-end investment mutual funds -- managed by professional VC investors -- who would receive 20% of the profits, if any, just like a regular VC firm does. The Investment Company Act of 1940 makes this illegal, which is why no one does it. This is the law needing change, not the accredited investor rules.

The Crowd Funding idea is not going to work and a very large number of small investors will lose all their money.

David M Cromwell
Senior Lecturer
Yale School of Management

(Before Yale, I worked for JPMorgan for 30 years and ran the venture capital investment business there for six years, until 1995).