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Crowdfunding: Real Private Equity

by John Bain

Kickstarter and Indiegogo sure are great. You can donate whatever you want to help out a small project that appeals to you, be it a product (the now-famous iPod watch, for instance), a game, or a band. If you donate $100, the producers usually throw in a t-shirt. Throw in a couple grand, and you could receive a crazy perk like a free skydiving trip with the cast and crew of an indie movie.

But what if you want to give $10,000 and get a piece of the action yourself?

No dice. For 10 grand you’ll probably get the shirt, the trip, and a cake with your name on it. You’ll get hugs from the team. You might even get something of actual, monetary value. But what you won’t get are returns.

That’s because you’re not an investor, as much as it feels like you are. You can’t be an investor owing to the Securities Act of 1933, which states that if you’re not worth $1,000,000 or more, you can’t invest in a privately-held company. That’s ridiculous, mostly because in 1933 there were, like, four guys in America who were worth more than a million and two of them were named “Rockefeller.”

It’s even more ridiculous in 2012, because it’s an unnecessary impediment to small businesses who already have it hard enough. Fortunately, in April of this year President Obama signed something called the JOBS Act into law. That’s the “Jumpstart Our Business Startups” Act, and it makes a practice called “crowdfunding” legal.

What is crowdfunding? In short, it is the logical conclusion of what sites like Kickstarter stand for. In this era of bite-sized entertainment and communication, you want to make micropayments to help the things you love become a reality. Crowdfunding allows you to do just that, except now it’s legal to make money from your support.

Essentially, you can be a student with $100 in the bank, give $10 to a company, and end up with .001% ownership of a company that may one day be worth $1 billion. Anyone can be an investor.

Let me just editorialize right now and say that this is awesome. I can imagine a whole new sector of the economy based on these micropayments. And I’m not thinking of the typical college-kids-start-a-software-company stuff here.

I’m thinking more along the lines of possibilities for social justice: an impoverished community could pool resources to invest in a store, for example. Immigrants could finance their own ESL programs. This is the American Dream (the one where you get rich by being smart with your money) democratized and made attainable for real, actual people.

But I can see why the Securities Act of 1933 was passed originally, and that’s because of the danger of fraud when it comes to investing in a private venture. As recent history (Enron, Madoff, 2008) shows, the government can’t watch all the money all the time. If the SEC can’t keep the big guys in check, what’s going to happen when a bunch of two-bit players get on the scene?

That’s why crowdfunding isn’t strictly legal yet – the S.E.C. is working on regulatory rules that will be introduced around September. But I’m doubtful they can catch every case of fraud even with the new guidelines, so the advice (as always) to investors is be careful. It would be a miracle if no one was defrauded in the initial “gold rush” period after legalization.

But we shouldn’t let that discourage us. In crowdfunding I see the faint outlines of what a more equitable and democratic society would look like, especially considering ideas like a crowd-funded bank that would put money and power back where it belongs: with the people. And remember crowdfunding is much more than a noble idea…

It could also make you rich.

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