On Monday in our normal Coffee & Markets podcast - which you can listen to here - my colleague Wall Street veteran Francis Cianfrocca made a strong case against the crowdfunding elements of the JOBS Act. It surprised me, and the conversation got pretty heated. We had dozens of emails from listeners after the show, with the vast majority disagreeing with Francis. So we followed up with another episode this morning on the topic, sharing some of their emails.
The chief disagreement was a philosophical one about the role of government and the regulatory state which brings out my more libertarian impulses. Should the American people be barred from participating in crowdfunding/Kickstarter projects as anything more than, essentially, locked in pre-orders of a product? What great social ill is prevented by barring these small businesses and projects from offering equity?
Here's one email I received from Transom subscriber Tim, a small businessman who relies overwhelmingly on seed capital from family and friends:
“Francis argued the Federal government should regulate crowdfunding based on the need to "save" the rubes (as you call them) from themselves in making bad investments and losing their money. I assume this is meant to prevent some sort of bubble in the economy. My question for Francis is if indeed the Federal government should exercise this power what is preventing it from regulating private citizens investing their own money (and/or family members’ money) in their own private small businesses? Francis and others might discount this as silly comparison but why is it? It is the logical extension, the inevitable slippery slope, of the stated motivation of regulating crowdfunding. Many Americans start small businesses that they have little or knowledge about, like restaurants, or they have knowledge about a product or service but have no idea about running a business day-day. What is preventing the Federal government from requiring that anyone starting a new business must have a certain amount of money in reserve, beyond the necessary startup capital, in order to save the unwashed masses and their families financial disaster when the business fails? In the end this seems to be the typical guild mentality, something Walter Russell Mead writes about often. Create artificial barriers that at best are meant to minimize risk and competition.”
The impression Francis seems to hold is that there are 10,000 rubes ready to be fleeced by someone who sells them the next Google – while my impression is that this is rather small groups of people looking to put small investments in products they want to exist, where the top-line success perhaps looks like the next Crocs-like creation.
While I understand the critique that this could preclude institutional investment later on, the fact is that there are very few options for projects of this size to turn to for early-stage funding, and being cash poor can preclude hitting the right window with your idea. As venture capital has moved up the chain to deal in bigger figures, the crowdfunding aspect here is designed to foster new startups chasing down interesting ideas. Given the limitations of the law, I just don’t see the prospects of a crowdfunding bubble as particularly real or particularly dire.
What’s more, the motivation is in part fueled by perspective from the American layperson that deal creators and plugged-in investors do nothing but scratch their friends’ backs, barring the common man from the game until after the biggest pie has already been divvied up. And that's hardly an element of democratic capitalism I would support. What about you?