British newspapers are buzzing this week with headlines like “Could crowdfunding be the next big investment scandal?”
Let’s be clear about a few things here in the U.S:
- The reference to “investment” means that we are discussing equity crowdfunding. This is different from most types of crowdfunding that you’ve heard or read about. Buying stock in small unproven companies is very risky.
- Equity crowdfunding in the U.S. is in its infancy. We’ve only had a total of about 50 offerings completed to date in the past few months. That gives us no data about investment performance.
- Other types of crowdfunding do, in fact, involve such high levels of fraud that you can anticipate that if you participate then you will be cheated. I’ve posted elsewhere that the available data on scams on Gofundme, for example, indicates that fully legitimate projects are in the minority.
- The federal law that allows equity crowdfunding, along with the many supplemental state laws, attempt to limit the amount that an investor can lose. In my opinion, these are adequate protections for investors. it is mathematically unlikely that equity crowdfunding losses under these rules could be called a “big investment scandal”. Nevertheless, equity crowdfunding is likely to be the riskiest, most exciting and most lucrative option for small investors for the foreseeable future.