Rebuttal piece: Crowdfunding has its place, but it’s a crazy way to invest

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NCFA Canada | Craig Asano | June 8, 2015

Neil Gross FAIR Canada on CrowdfundingOn June 1, 2015, Neil Gross, Executive Director of Canadian Foundation for Advancement of Investor Rights (FAIR Canada) contributed an article to the Globe and Mail that highlighted a series of risks to the reader community, specifically:  1. Extreme Failure Rate, 2. Fraud, 3. No Accountability, 4. Illiquidity, and 5. Dilution. (see original post which appeared both online and in print:  Crowdfunding has its place, but it's a crazy way to invest.

A few thoughts in response:

  • Crowdfunding can fill an important niche in any portfolio and is not meant to replace any existing platform.
  • People want to invest in something they believe in or that fills a need within the marketplace that they know exists, not just look at P/E or public markets.
  • Small businesses, especially startups, are critical to the Canadian economy and we need every possible avenue of funding to be open to give them the support they need.
  • Canada has been notoriously poor at supporting innovation at the ground level and this is the best thing to happen on this front in decades - let's not drag down these important gains.
  • Technology and the data it produces has already disrupted many major industries - and it's long overdue in this area.
  • There is always resistance to new ways of thinking and new approaches. Some people benefit from the status quo and will fight to keep it, but far more people benefit when from disrupting those power structures.
  • If you have an online trading account, you can borrow $100,000 with the click of a mouse and put it on any one of the several penny stocks - that's far riskier that what crowdfunding offers.
  • This is about choice. A healthy economy means consumers have choice in the marketplace and crowdfunding gives them more choice.
  • This is the way of the future - technology has given the individual more power than ever before, and people are demanding the right to exercise that power how they want.

Below are a few responses from the crowdfunding industry and community which intends to provide readers with a more holistic view of both the opportunities and risks inherent with investing in crowdfunding markets:


Equity Crowdfunding: Good and Necessary

Neil Gross’ article in the June 1 edition of the ROB (“Crowdfunding has a place, but it’s a crazy way to invest.”) is grounded in a fundamental misunderstanding of risk in business and in the investing world.

Mr. Gross contends that start-up businesses are intrinsically high risk and that equity crowdfunding actually increases the risk of investors in those types of firms.

Are Start-ups really riskier today?

Today’s business world has become intrinsically riskier up and down the spectrum of companies, from the largest to the smallest, as disruptive technologies attack established business models in the supposedly safest industries. Look what’s going on in banking. The CEO of RBC sounded the alarm several months ago when he commented that the banks were on a ‘collision course’ with the likes of Facebook and Google.

And, that’s just the tip of the iceberg as many specific banking business lines from foreign exchange to mobile payments come up for grabs by new upstart competitors unburdened by legacy branch networks and haphazardly-stapled together technology systems.

On the same ROB page was an article on P2P lending whose author called the development, “A game-changer – if we don’t hinder innovation.” Crowdfunding too can be a game-changer unless, as too often happens in the financial sector, this innovation is stifled by super-regulation.

The iron reality is that no firm of any size is safe today. Just ask Encyclopedia Britannica.

Does Crowdfunding Increase Investor Risk?

Just the reverse. Crowdfunding can decrease the risk for investors as a whole. A company that fails to excite potential investors and that fails to attract a crowd of those investors is likely going to fail in the marketplace.

Crowdfunding may simply lead to poorly-conceived firms with weak business plans getting frozen from accessing capital sooner, rather than later. So, crowdfunding may result in more efficient capital markets in Canada than we have today.

The Role of Retail Investors

An episodic debate in Canada has been around varying views over the role of retail investors in funding early-stage companies.

Mr. Gross’ article clearly lands on the side of those who distrust retail investors to look after their own interests – unless accompanied by huge dollops of regulation and professional advice.

It’s important to recognize that the regulators aren’t going away and have set strict limits on the exposure of individual investors to individual firms.

It’s also worth recalling that the advice channel has not been immune from fraudsters like Bernie Madoff. Under the present crowdfunding rules, it’s hard to imagine any repeat of the multiple billions that were siphoned off by Mr. Madoff…and, sadly, he hasn’t been the only one of his ilk, only the most egregious example.

This takes us back to risk. There is risk in every path to investing.

By Richard Remillard, President, Remillard Consulting Group, and NCFA Board member

Other posts by Richard:

A fearless forecast for 2015

Canada needs a financial innovation institute

 


Via email:  Equity Crowdfunding is Creating a New Playing Field

What I am confused about in this article is whether he is talking specifically about startups funding in general or crowdfunding?

Looking at the dot-com bubble bursting or past on-line IPOs that had a big downturn prior to some recovering, I sense this piece was written in haste without much research on relative investment options.

Each of his main categories, Extreme Failure Rate, Fraud, No Accountability, Illiquidity and Dilution can be attributed to angel investing and even seed rounds where the startup is being highly sought after. Realistically, the mandatory reporting of investment status is the only difference and as with any industry, expectations will dictate some information transfer. Eventually it may even become a way of weeding out riskier options if they are not very transparent.

Equity crowdfunding is creating a new playing field where people who have already been involved in the rewards/charity funding side of things can now take the risk with the longer-term reward for a company's success. If an investor does not do their due diligence and research the company, competition, industry and customer base, there is no difference in putting money in a risky stock market pick vs. equity crowdfunding.

The startups are still going to have to work  as hard to convince people to invest in the their company because they will be in it for the long-term success, not short-term rewards. All of the elements of the pitch deck, understanding the investors and showing your roadmap for success will still be there. What will happen is a number of angel investors will be able to expand their portfolios with smaller investments. Partners in Venture Capital firms can put a stake early on with less invested and less to lose.

If anything, I expect this to be a new stage of the investment process where the startup has no existing customers, run rate, prospect funnel or even a minimal viable product (MVP) to showcase. Concurrently or prior to bootstrapping they will have the ability to pilot the MVP, gauge market interest, market for recruiting talent and even pivot along the way depending on market traction with less investment early on.

By Shahab Khan, NCFA Ambassador

LinkedIN Post: here

IT Business Article - contributor:  here


Via Email:  Equity crowdfunding is working in several international jurisdictions

Interestingly FAIR has proposed practical "solutions":  here

Several international countries such as Australia, France and U.K. have used equity crowdfunding in all manners. This infographic for examples refutes what Neil Gross writes:
- "Startups" and especially tech startups are less than 24% of businesses funded.
- Many businesses come back for a 2nd rate of funding. Which means it works. A few have existed
Additionally, the "crowd" can do due diligence and make sure the business is good.
 l
Heri Rakotomalala, NCFA Ambassador

Via email:  Crowdfunding is not just for high risk Start-ups

My issue with this article is that they've applied the term crowdfunding only in the context of high risk startups offering equity in their new venture. In my mind this stance only looks at the industry providing access to capital for those that would never be approved by traditional banking. While that is a valuable aspect of crowdfunding, it completely ignores the firms with long track records of above average returns looking to provide quality investments, typically exclusive to high net worth investors. We're working with lots of groups and have spoke to many others with great strategies to provide low risk investments as well. Then there are asset backed securities and other variations that are great to the average investor limited to mutual funds through their financial advisor. Private markets can provide opportunities like the public markets as well.
These arguments are merely directed towards startups. I agree that a non sophisticated investor shouldn't be large sums in new ventures, but perhaps 5% that is already allocated in a speculative portfolio. Most average investors don't race into the public markets that are readily available so rule changes aren't going to cause a stampede of investment into crowdfunding projects. Investor protection groups should also be advocating access to better investment opportunities.
The rules will dictate who will participate in the market, so if the rules don't make sense for firms that really know what they are doing then of course it will make a high risk investment space.
d
Brock Murray, CEO/co-founder, Joi Media / Katipult and NCFA Board member
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Interested in more?  Dispelling myths #1 and #2

 If you'd like to contribute your thoughts on this topic/article please email info@ncfacanada.org.


 

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 950+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit www.ncfacanada.org.

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