Will 2014 Be the Year the SEC Kills Crowdfunding? And Innovation With It?

According to a recent article over on VentureBeat, it might cost you $39K to crowd fund $100K under the SEC’s new rules. On October 23, 2013, the SEC Issued its Proposal on Crowdfunding, available as a 585 page PDF, that, if passed, could put an end to crowd-funding, and even innovation, as we know it.

According to the VentureBeat article, the (proposed) legislation requires that the selling of crowd-funded securities take place on registered websites, which doesn’t sound too bad, until you also add in that these websites (which must be registered with the SEC and FINRA), must also provide investors access to a business plan, a detailed breakdown of the planned use of the proceeds, a company valuation, and financials. And already the problems begin.

If you look at the average Kickstarter campaign, it is to create something new, through a new endeavour, which has no financials, no company valuation, and no business plan beyond we plan to build this, in this way, and our production estimates are that it will cost this much. In the end, we will deliver X to you, or to the community. The business may or may not go on once the product is completed (and delivered). Moreover, these efforts are typically put together by the innovators themselves, who have expertise in creation and production, not writing business plans that have to include sections on marketing, sales, financial projections, etc. etc. Who’s going to write this plan? Create the (potentially ludicrous) financial projections? Provide, and take responsibility for, a valuation of a company or product that doesn’t exist?

But this is just the beginning. If the event (intends to) raise(s) 100,000 or more, in addition to providing potential investors with tax returns for the most recent tax year, the firm also has to provide investors with audited financial statements (before the offering and audited tax returns after the disposition of the funds). CPAs (Certified Public Accountants) are not cheap!

In addition, a crowd-funding campaign has to pay the registered website a success fee (calculated as a percentage of proceeds) for facilitating the transaction, compliance costs related to the preparation and filing of individual forms related to the crowd-funding offer both before and after the campaign, and additional fees to third parties whose help it will need to complete the financial (projections), business plan, and obtain a market valuation.

All told, the SEC estimates portal and compliance fees will eat up between 12.9% and 39% of the money raised, but, depending on what the fees turn out to be, and how much help the inventors and creators need to satisfy all of this bureaucratic BS, the costs could conceivably reach 50% of the proceeds, or more!

What is the SEC thinking? If a bunch of educated and reasonably well-informed people want to risk throwing $5 to $5000 of their disposable income behind someone who is willing to take a chance and try to do something new, what’s wrong with that? Innovation is what made North America, and without continued innovation, North America is going to be in big trouble. GDP growth is nominal, unemployment is high, and China owns too much of our debt. We need to be encouraging innovation, not discouraging it.

And while the SEC is spending time and effort writing 585 pages of rules to govern amounts of money that are minuscule in the grand scheme of things, hedge fund managers and investment banks that can crash the market and tank our economy literally overnight run free and get rich at our expense. (And SI agrees, the bank ain’t gonna help you.)

SI isn’t saying that there shouldn’t be some regulations around crowd-funding, as you do want some protections for the common man, but they should be reasonable and minimal. For example, maybe crowd-funding regulations should allow for unregulated crowd-funding events which could be:

  • limited to a maximum raise of 999,999,
  • limited to a maximum investment of 9,999 per investor, and
  • limited to registered platforms
    (that can register for free and decide whether or not they want a cut of the money raised with a 2% limit).

With the exception of (big studio-quality) movies *, most of the crowd-funding efforts are for initial product or idea development, and most of them are looking for (well) under 1,000,000, which is the number where you are looking to build a real company and would, presumably, be far enough along where you could bring in (super) Angel and VC funding.

In SI’s view, the individuals and small teams behind the efforts should be left alone and given a chance to innovate. Some may fail, but that’s okay. The point is that most will succeed, and anyone who is going to invest in crowd-funding understands that innovation is fraught with risk and that sometimes success only happens with grass-roots effort.

If you also agree, your chance to provide the SEC with your views expires in two weeks on January 21, 2014! SI encourages you to Submit Your Comment through this link today! Please save crowd-funding! We need every ounce of innovation we can produce!

* These should have their own class of exemptions. You might want some accountability due to the large amount of money that can be involved, but certainly nowhere near the levels that traditional investments of this size require.