Slate's Yglesias: Crowdfunding Will Be 'Disruptive'

Friday, 31 May 2013 09:44 AM

By Michael Kling

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Crowdfunding promises to be a "disruptive innovation," predicts Matthew Yglesias, Slate's business and economics correspondent.

"All in all, I think we've rarely seen so much promise and so much peril all rolled into one underdiscussed piece of legislation."

The Jumpstart Our Business Startups (JOBS) Act allows ventures to raise small amounts of money from any investor. Theoretically, hedge funds could advertise on television, but that probably won't happen since hedge funds value prestige and exclusivity as opposed to mass marketing, Yglesias writes.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

Instead, new operations will sell small shares, he predicts, citing Fundrise, which sells small shares over the Internet for urban infill real estate projects.

The point of crowdfunding is to raise funds for projects that large funds won't finance. If crowdfunding catches on, Yglesias says, it will grow over time and eventually compete against those large pools of capital.

A major concern is that small investors will lose their shirts in bad decisions and charlatans will target unsophisticated investors. That, he concedes, will probably happen.

But if consumers put their money in online ventures instead of frivolous spending, crowdfunding will be for the better. "But sooner or later someone's going to end up swindling someone out of their life savings and there's going to be a big backlash," he notes.

"Crowdfunding is a great example of what the concept of disruption is supposed to mean."

The problem is that crowdfunding is the most expensive option for entrepreneurs raising capital, according to AnnMarie Mcllwain, CEO of CareerFuel.net, and Donald Murray, a securities attorney and partner at Covington & Burling LLP. Those high costs are "market killers," they write in an article for The Hill.

Costs to complete a $1 million fundraising campaign, the maximum allowed, include: $40,000 to $80,000 for an online platform, $20,000 to $40,000 in legal fees to create the offering document and closing statements, accounting fees of $15,000 to $75,000 for an audit if the offering is over $500,000, and due diligence costs of $1,000 to $10,000 for background checks of company officers.

"First, if up to 20 cents of every dollar is spent on fundraising, the entrepreneur will have a difficult time achieving the business-building objectives envisioned by the business plan. Second, these costs are significantly higher than other options available today."

To cut costs, they recommend raising the $1 million cap, eliminating the need for an audit and requiring uniform selling and closing documents.

The Securities and Exchange Commission (SEC) should create rules to encourage crowdfunding to expand investment capital and create jobs, they urge, noting that many details of the JOBS Act were left up to the SEC.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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