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Crowdfunding: Don't panic, don't pout

Crowdfunding: Don't panic, don't pout

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Published by: Crowdsourcing.org on Mar 28, 2012
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Crowdfunding: Don't panic, don't pout
By Sara Hanks, - 03/27/12
Imagine you have a great idea for a small business. You’ve identified an
untapped market, drawn up a detailed business plan and saved about 50percent of 
the capital to get the idea off the ground. But your bank isn’t
lending to start ups right now-
you’re too much of a risk. And there is no
rich aunt to leave you an inheritance.Where can you get the money to make your dreams come true? Theanswer is crowdfunding. The idea behind crowdfunding is simple: anentrepreneur obtains money through the Internet from many micro levelinvestors, instead of using traditional banks for a line of credit and
 beyond what the entrepreneur could have obtained from “friend
s and
family” investors. Until now, crowdfunding has been popular with non
-profit projects but illegal for capital investors looking for a financialreturn on their investment.And with so much turmoil in the nation's banking institutions, theentrepreneurial spirit in this country is at risk of being choked to death.Banks have become more and more afraid of taking risks - even smallones. Capital for start-up ventures has become harder and harder tocome by. By opening up the Internet to investors looking for newbusinesses to invest in, we can stoke the creativity that is waiting to beunleashed in this country, especially for entrepreneurs who have givenup on employment in the formal sector of the economy.
Last week, as part of the JOBS bill, the Senate passed legislationauthorizing for-profit crowdfunding. The Senate language wisely addedinvestor protection to the original version of a crowdfunding measurepassed by the House. Now the House must vote on the Senate version.Cue howling in the blogosphere!One faction argues that the world is now materially less safe; thatfraudsters will lurk behind the azaleas at every senior center, trying toconvince grandma to invest in cold fusion. The other side wails that theSenate version fetters the free spirit of crowdfunding and that Congresshas missed a chance to unleash the creative power of Internet 3.0 tomatch entrepreneurs with sources of capital.As always, the truth is somewhere in the middle.Websites likeKickstarter.com andIndiegogo.com already offer nonprofit crowdfunding for filmmakers, bands, artists and campaignsthat need financing to make their projects a reality. In return for theirmoney, investors are promised a credit in the program, or a t-shirt signedby the band. This do-good, feel-good system has gone along wellenough because expectations of return on investment are minimal. Butnow that the flood gates of for-profit crowdfunding are about to open,we need some real regulations and honest brokers built into the systemto make sure it works fairly for everyone.The fact is, where there is money, there will be fraud. Those who arguethat there isn't any fraud in crowdfunding are blinded by their love of theconcept. In nonprofit crowdfunding, who cares if the band doesn'tdeliver the promised t-shirt? And thus far, the amount of money raisedin offshore for-profit crowdfunding venues is miniscule.
Opening up crowdfunding in America is going to let the world finallysee the potential for truly democratizing access to capital. But with thatfree-wheeling emerging market, an explosion of activity means lots of deals that will be too good to be true.As a securities attorney for more
than 30 years, I’ve worked for the SEC
and for one of the largest law firms in the world, helping entrepreneursaccess capital the US and in emerging markets like India, Brazil andIsrael. And most recently, as General Counsel of the CongressionalOversight Panel on TARP, I have first-hand experience in forensicaccounting and identifying fraudulent business practices. I know, and Ihope crowdfunding advocates soon realize, it is imperative thatCongress adopt reasonable measures to regulate the marketplace so bothentrepreneurs and investors are protected against fraud.The parameters for crowdfunding in the Senate version of the JOBS Actare somewhat constrained. This is a good thing. It will provide an earlywarning system to alert us if crowdfunding is going astray. People whoare pouting across the Internet need to appreciate that if there is massivefraud at inception, the market will die forever. In the long term, it isbetter to accept restrictions now that can be loosened later. This is onegenie you can't stuff back into a bottle, especially when he'saccompanied by a couple dozen African princes who just need you towire $6,000 so they can
develop their killer “Angry Anteaters” iPhone
app.Conversely, I hope that the apprehensive opponents of crowdfundingappreciate that constraints are going to thoroughly regulate the market.My career has shown me that when the rules of play are clearly defined,and there are good referees ensuring fair play, the market will work.

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