Tuesday, July 5, 2011

SEC comes down hard on crowdfunding; considers changing rules

About a month ago, I wrote a post about the crowdfunding phenomenon, and the fact that none of these sites were focused on two key ingredients: 1/ regulations of promoting investments to the general public, 2/ securing funds and legal issues for the investments they promote and make.

Naturally I received a slew of emails complaining that this was not fair nor does it help the future of crowdfunding as an alternative to traditional investment channels. Though I agree with most, I do believe that crowdfunding platforms will have to differentiate themselves beyond the notion of attracting crowds - an already established paradigm by social networks. 

They will probably have to ride two horses at the same time - classic fundraising that meets regulators' existing laws combined with the crowd's ability to drive deal picking. Once there are a few success stories based on the crowd's input - after all they are the customer too, then the model can grow into a funding platform as well.

Rachid Sefrioui, an experienced venture capitalist from California, confirms that with any new model, there needs to be social acceptance by established crowds in that space. "if there wasn't a MySpace, Facebook would probably not have the traction it has today; if there wasn't a Plaxo, LinkedIn would not have grown so fast". 

So there are precedents in establishing one part of the formula - crowds picking deals, then establishing the second part of it - crowds funding deals, confirms Rachid Sefrioui, Managing Director at Finaventures.

Eventhough the SEC is considering loosening its rules, it will be difficult to see them completely change the rules where it becomes a free-for-all with little or no registration requirements.