Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Category Archives: Fintech Opinions
Ubuntu Edge crowdfunding campaign ‘doomed to fail’
The Telegraph by Sophie Curtis | August 10, 2013
Canonical's ambition is admirable, but with less than two weeks to raise another $23 million, the chances of the company meeting its crowdfunding target are slim, says Sophie Curtis.
Canonical, the software company behind the Ubuntu Linux open source operating system, launched a crowdfunding campaign on 22 July to raise money for the development of its flagship smartphone, Ubuntu Edge, which it says will launch early next year.
The Ubuntu Edge will have a 4.5-inch 1,280 x 720 HD display with "pure sapphire crystal" touchscreen rather than glass. It will have a 8MP rear and 2MP front camera, and run both the Ubuntu phone operating system, which launched in January 2013, and Google Android.
The company hopes to raise $32 million (£21.5m) using crowdfunding website Indiegogo. In return for a pledge of £446, backers will receive their very own Ubuntu Edge smartphone in May 2014, after the device launches, and will also have an opportunity to participate in the final selection of some of the materials and software capabilities.
The Ubuntu Edge smashed crowdfunding records on the first day of its campaign, raising $3.5 million (£2.2m) in just 24 hours. After that, however, the rate of contributions decreased dramatically, and at the time of writing the company had raised just over $9 million (£5.8m) - a rate of £320,000 a day.
In order to meet its target, Canonical now has to raise over £1 million in backings per day - a challenge which some say is insurmountable.
According to Jason Waddell, consultant at Open Analytics, one of Canonical biggest mistakes has been repeatedly changing the amount of money that backers have to pledge in order to secure an Ubuntu Edge smartphone.
First the company said that anyone who pledged $600 (£394) on the first day, or $810 (£532) thereafter, would get a device; then it introduced a system where a fixed number of devices were available at different price tiers rising to $775 (£592); then finally it announced that the price would remain fixed at $695 (£446).
"Although the device sports impressive hardware, Canonical's asking price of $775 proved far too high for a speculative purchase in a marketplace filled with proven devices," said Waddell.
"I expect the $695 price point to bolster consumer interest, but the outlook is still bleak. $695 is a lot to ask for what is ultimately a speculative purchase. When I shop for electronics I do a lot of research. I try the product in stores to see how it looks, see how it feels. I don't think I would ever pay $700 for a device sight unseen."
He added that Canonical's campaign rewards are very sparse, and although there are 5 reward levels - at $20, $50, $695, $10,000 and $80,000 - there is little incentive to pledge more than the price of a single phone, even for the hardcore Ubuntu enthusiast.
By comparison, other successful crowdfunding campaigns - like the Pebble watch, which raised over $10 million - have boasted a broad spectrum of options, with upwards of a dozen pledge tiers between $5 and $500 alone.
Continue to the full article --> here
Crowdfunding- Why Angels, Venture Capitalists And Private Equity Investors All May Benefit
Forbes by Ryan Caldbeck | August 7, 2013
Ever since the JOBS Act was signed into law last year, there has been much ado about why angels, venture capitalists and private equity firms will love/hate/be indifferent to the new financing vehicle, crowdfunding. In April 2012, we launched our equity crowdfunding platform focused exclusively on the consumer products and retail industries. While we are still in the early innings of what we hope will be a very long game, I have interacted with countless angels and VCs over the last 18 months, and I spent seven years as a private equity investor before that. As a result, I have gained an appreciation for how each type of investor really views crowdfunding, and it is different from how pundits outside of the industry think they view crowdfunding.
Angels. Crowdfunding impacts no group more than it does angels. Companies that crowdfund typically raise $1 million or less. This is the sweet spot for angels. Ironically, however, we have found that angels love well curated equity-crowdfunding sites. Why? The answer is deal flow. Sure, there are a handful of angels in Silicon Valley (think Ron Conway) who see great tech deals before others and who have established such a prominent brand that companies come calling on them. For the vast majority of angels, however, and especially those outside the friendly confines of the Valley, it is both difficult and time consuming to generate quality deal flow. This is where great equity crowdfunding sites come in: a well curated site saves time, and extends the reach, for angel investors. This allows the angels to focus all their efforts on due diligence, which will ultimately yield a higher return on their time. Furthermore, these diligence materials available on an online platform are detailed and organized, as crowdfunding platforms have to aggregate a company’s materials before it raises on the site. The availability of these diligence materials alone—of businesses that have already survived a strong crowdfunding site’s stringent curation process—can save angels countless hours, allowing them to focus on their own due diligence.
Angel groups generally love crowdfunding and many count themselves as investors on a great equity crowdfunding site for the same reasons individual angels like it—deal flow, deal flow, deal flow. While some older angel groups are encouraged to shun crowdfunding by their business development director, I believe this is the result of incentives. Simply stated, these biz dev folks are compensated more for keeping their platforms closed. These, however, are now a minority. And there is a reason for this: the relationship between angels and responsible crowdfunding platforms is a mutually beneficial one, with angels providing capital and expertise and platforms providing free deal flow. Crowdfunding will not replace the best Angel groups, with provide community, education and expertise to angels and their portfolio companies.
Venture Capital Firms. Unlike angels, VC firms are likely less interested in the deal flow that crowdfunding can provide for two reasons. First, VC firms are staffed by teams of investment professionals whose sole job it is to generate deal flow. If these firms rely on crowdfunding sites for their deal flow, it is very difficult to justify charging a 2% management fee and 20% carried interest to their limited partners. Second, there has been a lot of chatter about how crowdfunded companies will not be able to attract VC money when they raise subsequent rounds of capital because VCs don’t want to deal with the complications of a fragmented investor base. This concern misses the broader point of why VCs will not invest in crowdfunded companies and it is a classic lemon problem: over 70% of VC dollars flow to tech (and biotech). As I’ve written about in this space before, great tech start-ups should not have a problem raising capital from VCs, as seed money is abundant for tech. A techstart-up’s failure to raise funds conventionally, through the VC route, suggests a weakness—because it is a tech company, and tech companies are generally favored by VC firms—at least in relation to consumer products and retail businesses. What follows from this is the impression that any tech business that needs to resort to crowdfunding must be weak. It is far more common for a VC firm to pass on a strong high-growth consumer products or retail business than an equivalent tech company.
Continue to the full article --> here
Poll: Dispelling Popular Crowdfunding Myths
Posted on August 8, 2013
On July 31, 2013 an opinion post article in the Financial Post’s comment section highlights the wide disparity in thinking between the established finance industry insiders and the rest of the world (view article).
Please take a moment to share your thoughts about the proposal by voting in our poll or leaving a comment below. More information can be found in the links below:
Resources and Links:
Dispelling Myths #3 and #4: “Extraordinary popular delusions and the madness of crowdfunding”
NCFA Canada | Posted on August 8, 2013
Note to readers: This post is part of a series of posts written on behalf of Canada’s leading industry crowdfunding association, NCFA Canada, its members, and affiliates. Special thanks to our sponsors Joi Media (Katipult), FundRazr, Amplifi, CNW, and Wires Law, and the following contributing thought leaders including Craig Asano (NCFA Canada), John Wires (Wires Law), Christopher Charlesworth and Asier Ania (HiveWire), and Heri Rakotomalala (Seeding Factory).
On July 31, 2013 an opinion post article in the Financial Post’s comment section highlights the wide disparity in thinking between the established finance industry insiders and the rest of the world (view article).
It appears the world can be divided into two camps:
Camp A: Those that feel the general public or ‘crowd’ should have little or no participation in private market placements because they are thought unfit or incapable of adding value to the process, and the regulations required to protect them would duly outweigh the benefits they may receive from participating in the first place. Further, investing in start-up or growth capital investments is a risky game that should be left to professional VCs and sophisticated investors alone.
Camp B: Those that feel the general public or ‘crowd’ should have the choice to participate in private market placements in a regulated capacity, and that the general public is motivated to seek returns that go beyond financial incentives alone, such as supporting innovation, regional job creation and social impact goals. Equity crowdfunding markets globally have demonstrated that crowds can play a significant role in helping small to mid-sized enterprises (SMEs) access start-up capital and the necessary support to achieve business goals that would otherwise be unavailable to them in traditional capital markets.
To assist readers in making their own unbiased conclusions, NCFA Canada offers readers a response to the myths or one-sided beliefs that were conveyed in the FP article:
Myth 3: VCs and wealthy angels will not invest in companies with ownership structures that have many minor investors in them
RESPONSE 3: Legal co-operatives and nominee structures can support crowdfunding transactions
Canada can learn from legal structures being used overseas to successfully facilitate equity crowdfunding
In the Netherlands, Symbid, a leading equity portal bundles all crowd investors of each successfully funded business into an investor co-operative, which acts as a single shareholder within the legal entity of the entrepreneur.- With this model, VCs that participate in follow-on investment rounds only deal with a single elected Board member.
- This offers the best of both worlds: the benefits of wide resources and crowd participation combined with streamlined decision making capabilities.
- In the UK, Seedrs, a leading equity crowdfunding portal, uses a nominee structure where crowd investors appoint the platform itself to hold legal title of the securities on behalf of crowd investors who are still able to vote but are relieved of the burden of investment administration such as tracking corporate events, attending meetings and following investment performance.
Many VCs openly support equity crowdfunding as a means to fund early stage businesses that feed into wide venture capital markets
- There are many venture capitalists in Canada that openly support the inevitability of equity crowdfunding (e.g., Chris Arsenault's blog) as a way to fund high risk earlier stage of start-up businesses to the point that they have demonstrated sufficient traction and management ability before getting snapped up by a VC in a future round.
- They indicate that crowd investors are already participating in deals through angel investment matching networks, such as Angel List in the US.
- Crowdfunding is a feeder system to a much wider venture capital network, and we can only expect to see more partnerships forming as more fundraising activities are moved online.
Myth 4: High Risk of Business Failure and Fraud
RESPONSE 4: The crowd will help to detect and report fraud. Businesses will fail but some will iterate and achieve tremendous innovation through failure
Fraud and business risks can be identified and mitigated with education and technology
- Fraud in any area of the financial system should not be tolerated, and crowdfunding is no different. Industry stakeholders, government and academic partners need to collaborate to actively identify, report and prevent fraudulent activity and develop the appropriate safeguards to protect and advance the industry full stop.
- Fraud and business failure isn’t limited to private companies. Look at Sino Forest for example, where sophisticated financial and legal professionals performed reams of expensive due diligence to the tune of a $6 billion market cap only for the entire organization to collapse as a ‘ponzi’ scheme. Canada isn’t a ‘nanny state’ nor is it anti-business, so while public market activity marches, what about crowdfunding?
- The larger issue facing consumers is the risk of failure inherent with any new business venture, however this is expected risk and the crowdfunding industry will play a strong part in educating consumers by advising them of the various risks to their capital. There are over 60+ Canadian portals and a growing list of providers looking to help and NCFA Canada is working to provide best practice education for SME issuers, investors and industry stakeholders with partnering sponsors.
- Tools such as duration based page-timing, online testing, cooling off periods, and double opt-in consent provisions can be employed to educate participants of risk and maintain a verifiable record that investors were informed and consented to bearing that risk.
Innovation is an iterative process that requires effort and failure to germinate success, increase productivity and affect breakthrough change
- Innovation doesn't occur in a vacuum yet CAMP A would have us believe that failure is a bad thing. For the rest of us in CAMP B, we support innovation and understand that crowdfunding will help more projects and ideas get funded than traditional financing allows, thus allowing innovation to iterate and in some cases flourish. Some of those projects will most certainly fail, but some will grow wildly successful in unexpected and rewarding ways.
- Although Canada has world class education and thought leaders our ability to innovate and commercialize locally grown businesses is limited, and thus so is Canada's ability to compete on the global stage.
- Abraham Lincoln once said, "My great concern is not whether you have failed but whether you are content with your failure". In many ways, our current capital markets and securities laws are failing to provide SMEs with sufficient access to capital resulting in a well documented 'funding gap' (STDC report). Collectively, are we content with this failure?
WHAT CAMP DO YOU SUPPORT?
Crowdfunding is about providing capital to the rest of us - to that broad swath of the Canadian public that doesn’t have friends on bay street, isn’t connected to VC’s from the valley, and doesn’t have their private banker on speed dial. In fact, CAMP A sentiments simply underscore the reality that capital is constrained, and primarily accessible to a very small and select group of people.
Innovation is happening everywhere, and in every group, including those that are typically overlooked by the traditional financiers. However it is often occurring at a small and incremental level, rather than at the ‘home run’ level that CAMP A refers to.
Crowdfunding is certainly not going to be looked favourably upon by ‘wheezy old securities lawyers’ disinterested in rolling up their sleeves to innovate and change the currently expensive process that seems to benefit their practices in the first place. Change requires hard work and effort, and in this case, the beneficiary is the public and small to mid-sized businesses asking for help.
Who’s going to rescue them? Wheezy old securities lawyers; or new, dynamic online investment communities powered by crowdfunding markets and new technologies. You know which camp gets NCFA Canada's vote. How about you?
Resources and Links:
View Dispelling Myths #1 and #2
Stay tuned for Dispelling Myths #5 and #6!
The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization's profile and gain access to a dynamic group of industry front runners. Learn more eBrochure | Prezi or contact us at casano@ncfacanada.org.
6 Top Crowdfunding Websites: Which One Is Right For Your Project?
Forbes | Kate Taylor | August 6, 2013
Kickstarter, one of the most popular and earliest crowdfunding websites, is now open to Canadian projects. (Photo source: Kickstarter.com)
If you’ve been on the lookout for funding for a startup project in the last few years, you’ve likely explored crowdfunding – or, more specifically Kickstarter. But there’s a growing number of websites dedicated to finding funds for a creative and entrepreneurial projects, with Kickstarter in the lead. However, not all crowdfunding platforms are created equal. Here’s the breakdown on which may be the right one for you.
In a sentence: Kickstarter has become synonymous for crowdfunding, as the most popular site to find funding for creative projects.
Cost: 5% of funds raised, with an all-or-nothing model that builds urgency but leads to the loss of all funds if the goal isn’t met, plus 3-5% transaction fees
Pros: Name recognition, highest site traffic allows for greater project visibility
Limitations: approval process, limited to creative projects, only allows projects based in the US and UK
In a sentence: This flexible crowd-funding site serves as an open and accessible option for campaigns worldwide.
Cost: On the all-or-nothing plan, 4% of the funds of successful projects go to Indiegogo. On the flexible funding plan, Indiegogo charges 4% if you reach your goal, 9% if you do not reach your goal. Transaction fees are an additional 3%.
Pros: No application process, available in every country, diverse spread of projects
Limitations: More expensive if you don’t reach your goal, but without the urgency of the all-or-nothing plan
In a sentence: This crowdfunding website offers a unique type of visibility through a recent partnership with A&E Project Start Up.
Cost: 4% for completed campaign or 8% for partial campaign, with 4% transaction fees.
Pros: Easy to navigate interface, Success School offers tools for building better projects and businesses
Limitations: Step down in terms of traffic from Kickstarter and Indiegogo
In a sentence: This website is dedicated to raising money for anything from personal causes to nonprofits to entrepreneurial projects.
Cost: 5% for completed or incomplete campaign plus 2.2% +$.030 transaction fees
Pros: Deep social network integration to connect to people in your network, cheap and convenient transaction fees with funds going directly to your PayPal, can be used to fund anything, anywhere
Limitations: More difficult to connect with other entrepreneurers and investors, with less than 5% of projects falling into the category of entrepreneur/creative
There are plenty more crowdfunding sites for individuals and non-profits emerging on the scene, such as GoFundMe and Ulule. As the market grows, some sites grow more specific, such as Moola Hoop, which is centered on female entrepreneurs, or community-funded reporting site Spot.us. Take time to examine each site to find one that fits your needs in terms of potential funders, the quality of other projects and the site’s usability. Then, get the funds to jump start that project you’ve been waiting for.
To view the full article with all 6 crowdfunding websites --> click here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Dispelling Myths #1 and #2: “Extraordinary popular delusions and the madness of crowdfunding”
NCFA Canada | Posted on August 3, 2013
Note to readers: This post is part of a series of posts written on behalf of Canada’s leading industry crowdfunding association, NCFA Canada, its members, and affiliates. Special thanks to our sponsors Joi Media (Katipult), FundRazr, Amplifi, CNW, and Wires Law, and the following contributing thought leaders including Craig Asano (NCFA Canada), John Wires (Wires Law), Christopher Charlesworth and Asier Ania (HiveWire), and Heri Rakotomalala (Seeding Factory).
On July 31, 2013 an opinion post article in the Financial Post’s comment section highlights the wide disparity in thinking between the established finance industry insiders and the rest of the world (view article).
It appears the world can be divided into two camps:
Camp A: Those that feel the general public or ‘crowd’ should have little or no participation in private market placements because they are thought unfit or incapable of adding value to the process, and the regulations required to protect them would duly outweigh the benefits they may receive from participating in the first place. Further, investing in start-up or growth capital investments is a risky game that should be left to professional VCs and sophisticated investors alone.
Camp B: Those that feel the general public or ‘crowd’ should have the choice to participate in private market placements in a regulated capacity, and that the general public is motivated to seek returns that go beyond financial incentives alone, such as supporting innovation, regional job creation and social impact goals. Equity crowdfunding markets globally have demonstrated that crowds can play a significant role in helping small to mid-sized enterprises (SMEs) access start-up capital and the necessary support to achieve business goals that would otherwise be unavailable to them in traditional capital markets.
To assist readers in making their own unbiased conclusions, NCFA Canada offers readers a response to the myths or one-sided beliefs that were conveyed in this Financial Post article:
Myth 1: History has shown crowd wisdom to lead to witch-hunts, bulb-mania and world meltdowns. Crowds are unable to vet deals as well as professional venture capitalists and experienced angels.
RESPONSE 1: Crowds offer the power of diversity and play a pivotal role in democratizing the entire funding and start-up eco-system
Crowds offer the ‘the power of diversity’.
In today’s dynamic marketplace, being open, inclusive and allowing diverse crowds to participate in your business offers start-ups and SMEs strategic competitive advantages, such as:
- Increased adaptability to constantly evolving market conditions
- Increased creativity and innovation – a cross pollination of ideas and perspectives in a larger pool of ideas to meet business goals
- Diverse views that facilitate effective decision making
- Deeper understanding of varying market and customer needs
The ‘crowds’ of crowdfunding play a pivotal role in helping the entire funding and start-up eco-system:
- Risk is diversified by having a large number of crowd investors contribute a small amount of investment dollars, as opposed to a few larger investors assuming greater risk
- Once committed, crowd investors help promote offers throughout their networks often making warm introductions to key players of the deal
- Crowd investors are first and foremost ‘customers’ and not backseat management drivers
- Crowds offer invaluable feedback and market research that is often critical to ascertaining the optimum product and marketing mix
- Crowd intelligence combined with sophisticated fraud detection algorithms will help detect and prevent fraud
Crowdfunding goes way beyond ‘funding’
Crowdfunding motivates and connects people and organizations and democratizes the underlying limitations of the current system driving fundamental change:
- Reduces the cost of transactions by leveraging the advancements of technology to handle high volume financial transactions and investment administration
- Crowdfunding breeds confidence and sparks participation. It enables a marketplace for ‘arm chair’ dragons to cultivate thus improving the general public’s awareness and understanding of small business finance and investments
- Gives government, industry and academia the opportunity to work together to achieve the common goal of Canadian competitiveness, innovation and job creation
- Adds transparency, tracking and standardization to financial transactions that occur in private markets that are non-reporting issuers
- Gives investors choice to diversify and self-manage their own portfolios by independently choosing the crowdfunding portal that best suits their interests and appetite for risk
- Enables investors to support their local businesses
- Allows lower margin and higher volume business models to compete and innovate in a traditional industry that will ultimately benefit from being disrupted
Myth 2: There’s been little or no statistical proof that equity crowdfunding works
RESPONSE 2: Crowdfunding works! Leading equity crowdfunding portals have proven that markets are becoming more sophisticated and accelerating in terms of total funding volume & the number of transactions.
- Equity crowdfunding is a global phenomenon and legal in several international jurisdictions such as Australia, UK, Netherlands and soon the US with the passing of the JOBs act. Why should Canada be at a disadvantage?
- In fact, ASSOB has legally been operating its equity portal for over 5 years and has successfully raised over $133 million dollars for over 180 companies of which over 80% of them are still operating today. Yes – that translates into innovation, more jobs and GDP for the country with zero fraudulent cases reported.
- CrowdCube in the UK has raised ~£10 million for 58 businesses including self-funding £1.5 million in 2 days from its membership base of 40,000. £4.4 million or almost half of all funds raised to date occurred in the first six months of 2013 indicating that growth is accelerating.
Further, Doug Cumming, Professor of Finance and Entrepreneurship at York University, and team studied 5 years of historical ASSOB data and released a report called ‘signaling in equity crowdfunding’ that demonstrates crowdfunding participation and markets are much more involved than just posting an idea as CAMP A would lead readers to believe. The most successful crowdfunded companies displayed the following characteristics and signals to their investors:
- Attracted more educated Board members to their company than average
- Signaled intention to go public (IPO) or exit the company via prominent venture capital firms or investment banks
- Offered financial forecasts
- Operated for some time with the entrepreneur investing his own funds (‘skin in the game’)
- Offered a limited amount of equity for sale
WHAT CAMP DO YOU SUPPORT?
Crowdfunding is about providing capital to the rest of us - to that broad swath of the Canadian public that doesn’t have friends on bay street, isn’t connected to VC’s from the valley, and doesn’t have their private banker on speed dial. In fact, CAMP A sentiments simply underscore the reality that capital is constrained, and primarily accessible to a very small and select group of people.
Innovation is happening everywhere, and in every group, including those that are typically overlooked by the traditional financiers. However it is often occurring at a small and incremental level, rather than at the ‘home run’ level that CAMP A refers to.
Crowdfunding is certainly not going to be looked favourably upon by ‘wheezy old securities lawyers’ disinterested in rolling up their sleeves to innovate and change the currently expensive process that seems to benefit their practices in the first place. Change requires hard work and effort, and in this case, the beneficiary is the public and small to mid-sized businesses asking for help.
Who’s going to rescue them? Wheezy old securities lawyers; or new, dynamic online investment communities powered by crowdfunding markets and new technologies.
Next: Dispelling Myths #3 and #4 --> click here
The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization's profile and gain access to a dynamic group of industry front runners. Learn more eBrochure | Prezi or contact us at casano@ncfacanada.org.
Extraordinary popular delusions and the madness of crowdfunding
Financial Post | Jeffrey G. MacIntosh| Last Updated: 13/07/31 6:57 PM ET
If you utter the word "crowdfunding" in front of a dusty old-fashioned securities lawyer, make sure you have a fully charged defibrillator on hand. Perhaps a fully equipped contingent of ER doctors and nurses. It won't be pretty.
Let's be clear - we're not talking about the mere solicitation of donations, such as the attempt of a Toronto man, reported earlier this week, to raise $400-million to purchase Mobilicity (note to prospective donors: If he succeeds, he owns the company, not you). That's perfectly legal. We're talking about the actual sale of an ownership interest to investors over the Internet.
At present, the default rule is that if a corporation or other issuer is going to sell securities it must assemble an informational document known as a prospectus. Because of arcane securities laws whose full import is only understood by two or three Tibetan monks, this is expensive. Even Buy-Rite-Cutand-Paste-Prospectuses will charge you about a hundred grand, and the bulge-bracket firms reportedly like to take an option on your first-born child. Understandably, the prospectus option is not the first choice of start-up firms looking to raise money.
Luckily, there is an escape hatch. There are various exemptions that allow you to sell securities without a prospectus. Thus, for example, a prospectus need not be used when selling to investors who are deemed to be sufficiently sophisticated to protect their own interests, such as institutions and well-heeled retail investors. In like manner, sales of certain types of securities that are thought to be inherently safe, such as government bonds, are exempted (although some investors in, say, Greek or Irish bonds might find this idea entertaining). In each case, the benefit that would be secured by requiring the extensive (and expensive) disclosure contained in the prospectus falls short of the cost.
The idea of crowdfunding, which is currently being mulled over by Canadian securities regulators, is to radically alter these capital-raising rules by allowing securities to be sold over the Internet to virtually anyone, with little or no mandatory disclosure. In part, the impetus toward crowdfunding is based on the view that there is a synergistic wisdom in the crowd that extends beyond that which can be found in traditional media or informational channels. To my mind, anyone who believes this should spend some time with Charles Mackay's 1841 classic Extraordinary Popular Delusions and the Madness of Crowds. From medieval witch-hunts to the infamous Dutch tulip bulb mania to the Credit Crisis of 2008, crowd-driven behaviour has authored some of the worst meltdowns in human history.
Crowdfunding is not likely to give us another tulip bulb mania. But is it likely to succeed where private investors cannot? Consider how Silicon Valley venture capitalists (VCs), the most high-powered private investors in the world, make their investment decisions. First off, most have a laser focus on a narrow band of the technology spectrum, hugely facilitating their ability to separate the wheat from the chaff. They frequently supplement their in-house expertise with opinions from outside experts. Proposals have to pass through an initial high-level screen before being seriously entertained. Out of 100 proposals that make it through this screen, perhaps two will be funded. A partner in one of the Valley's most successful firms told me that for his firm, the number is one in 300. But even after this exhausting process, plus the skilled guidance of one or more VCs in growing the firm, perhaps 1% to 5% of firms that are funded will be "home runs" - the hugely successful companies from which venture capitalists earn most of their profits. The rest will either be write-offs or what are often called the "walking wounded" or "living dead."
So, if these Masters of the Universe have so much difficulty finding the really good ideas and grooming them into successful companies, can we seriously expect the hoi polloi to do better? Crowdfunding proponents are fond of the idea that there are currently lots of good ideas that are going unfunded. This is vastly overplayed. Every entrepreneur - and his or her family and friends - is convinced that they have a world-beating idea. But a few minutes spent watching Dragon's Den is proof that there are many, many really bad ideas out there being passed off as good ones. Just because the untutored think that they have a winner doesn't mean that they really do.
Continue to the full article --> here
