I am in favour of crowd funding…

For a new idea to gain access to capital can be very difficult not to say costly.   In principle I am behind the idea of crowd funding, but these are not investments.   They are punts, speculation, bets, nothing more, with the risk of loss of capital as close as you can get to 100%.  

Quite often a new idea will need some seed capital to move off the drawing board to a workable prototype.  Whether or not you invest will depend to a large extent on whether you know the area and believe or not in the idea.  

I think what is happening here at a fundamental level is that a lot of early fund raising activities are being given wider access and exposure to the body of potential investors in early high risk endeavours.   This is a good thing.

I think that this is a natural progression from a lower tech medium to one which takes advantage of advanced media/networking structures.   What will need to be developed over time are the tools and techniques used to assess, inter alia, risk and what is and what is not an acceptable stake for the capital risk taken on board.

On one level I think crowd funding is a different animal from the types of scams and frauds that have hitherto hit the unsuspecting investing public.  For one they will be exposed to formidable scrutiny from twitter/blog and other media tools.  For another, the risks of such ventures will need to be clearly communicated and it should be impossible for someone to access a crowd funding site and be under the impression that they are buying anything other than a very very speculative play. 

Crowd funding will be exposed to a lot of potential critical evaluation, perhaps a good deal more critical evaluation than many products and securities sold by institutions today.  You only need to look back at the business income trusts of the mid 2000s in Canada to realise that conflicts of interest can easily compromise status quo capital market integrity.  

It should also be clear that advisors/advisers, portfolio managers and sales persons should be cut off from crowd funding as part of their product/asset allocation armoury.   Crowd founding needs to be well outside the wealth management circle.   I would also extend this to no solicitation/advertising: fund raising activity and marketing materials should be limited to the crowd funding site.

Perhaps the issues will not be with regard to the losses on those plays that go nowhere but the equitable division of the spoils in those do. 

Anyhow, this issue deserves more introspection than a blog post or a newspaper article can deliver since the many arguments against crowd funding need to be seriously addressed as opposed to ignored.

Note:

http://opinion.financialpost.com/2013/08/29/let-the-crowd-raise-capital/

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