When the Obama administration approved the US JOBS Act in 2012 it was almost certain the crowdfunding aspects would attract charatans looking to separate gullible investors from their money.
And so it has turned out, with the New York Times reporting how some crowdfunding sites are worried by the poor quality of startups touting for funds on some platforms.
The Times piece follows the story of Ryan Feit, the founder of New York’s Seedinvest who tells how he has rejected substandard proposals only to have seen them embraced by other crowdfunding platforms with often terrible results for investors.
One of the early companies he rejected was shut down by regulators — who labeled it a fraud — after it raised $5 million from investors. And Mr. Feit expects it won’t be the last.
That fraudsters would be attracted to crowdfunding sites is unsurprising and with regulators still working out how to manage investor protection the field is still very much ‘buyer beware.’
High valuations are also an investor warning sign.
Mr. Feit has been particularly worried about companies that have assigned themselves sky-high valuations that will make it hard for investors to ever make their money back. In several cases, companies that he rejected because of their high valuations have shown up on other sites with the same valuations
The unicorn mania of recent years is the cause of this focus on high valuations and is strange for investors as those richly priced stakes are not in their interests or those of employees taking equity in the business. If anything, a ridiculous market valuation should be the biggest warning of all to potential stakeholders.
Ultimately though it may be that crowdfunding equity isn’t about taking a stake in a business but more showing one’s support for a venture suggests, Nick Tommarello, the co-founder of Wefunder.
Mr. Tommarello also noted that many small-time investors so far were viewing their investments more as donations to businesses they like, rather than as investments that will make money.
As JOBS Act equity crowdfunding campaigns are limited to a million dollars each, being the modern equivalent of the ‘friends, families and fools’ may be the future of these capital channels. Hopefully there won’t be too many fools.