Startup Exemption

Entries tagged as ‘fruad’

What Crowdfunding Opponents Don’t Want You to Know

November 15, 2011 · Leave a Comment

With all the time and attention that fraud has received, we wanted to talk about a much more important issue, failure.  Failure of early businesses happens 50% of the time – that’s just a fact of nature.  If we were to hold that fraud would happen 1% of the time, then failure is 50 times more important in risk mitigation for investors.  And nearly all Americans who invest in the public markets already mitigate against the risk of “losing it all” by way of holding a portfolio.  Diversification has been practiced for centuries, and it’s no different in any asset class, be it public equities, commodities or crowdfund investing.

We believe that prudent risk and fraud mitigation currently in HR2930, along with law enforcement provisions in the bill preserve the power of state and federal officials to aggressively pursue those who commit fraud.  Now, let’s create a plan to help more honest businesses succeed.

KNOWLEDGE & EXPERIENCE

When entrepreneurs talk about failure they talk about the lessons they learned and the experience they gained which is less sexy to the media than fraud.  In crowdfund investing, the entrepreneur has access to his investors to gain knowledge and experience from them in order to attempt to reduce the rate of failure.  The transparency and ease of many to many communication benefits all.

When investors talk about a stock’s failure, they always focus on the critical importance of diversification.  WHY?  Because everyone knows, a diversified portfolio is the best security against loss.  Why focus on educating people about portfolio diversification when it is easier to claim crowdfund investing will open the floodgates to fraud?

So why do we bring this up?  Because the opponents want you to focus on something that will grab the media’s attention (fraud).  This also distracts the debate while trying to prevent regular Americans from supporting entrepreneurs with their own dollars.

There are entrenched interests that don’t want you to focus on how getting capital to entrepreneurs will stimulate innovation.  They clearly don’t talk about alternative solutions.  AND most importantly they don’t want to lose jurisdiction over the business and revenue they are currently generating.  These are areas we hope the media starts to look into more fully.

Much of our new information economy is based on new ways of connecting people.  Preventing entrepreneurs from soliciting financing from their fans and potential customer base, equates to a massive form of economic suppression.  And it’s a suppression of the most powerful human right ever given, the 1st Amendment.

If the opponents took the time to think it through, they’d see that fraud is no more of an issue than in other forms of investing.  With prudent safeguards in place, let’s focus the majority of our energy on the real issues – continued education about diversification.

Think we are wrong?  Please tell us why.  How does one “lose it all” when holding a portfolio of businesses?  How does suppressing platforms which will drive Yelp-like crowdsourced checking & reviews of entrepreneurs help prevent fraud?

 

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Categories: Crowd Fund Investing · Funding Gap · Jason Best · Kevin Lawton · Sherwood Neiss · Woodie Neiss
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Crowdfund Investing ITSELF Is an Investor Risk Mitigation Strategy

October 26, 2011 · 1 Comment

There has been a lot of progress to date in our effort to make Crowdfund Investing (CFI) legal. The proponents, including the President who included our framework in the American Jobs Act as well as leading Republicans on the Hill who introduced HR 2930, otherwise known as the Crowdfund Investing Act, get it.

  • Capital is hard to come by.
  • Wall St isn’t focused on entrepreneurs.
  • The banks aren’t lending and private money is only for a select few.
  • Since donation-based crowdfunding is working, let’s apply those tenants to equity-based crowdfunding and get capital flowing to entrepreneurs; also known as our nation’s net job creators.

The model we propose is itself, a self-vetting mechanism that utilizes the Internet, and the wisdom of crowds to help mitigate risk for investors. CFI isn’t free money. In a time of recession folks are even more cautious about their money and no one is going to look at this as a way to make a quick buck, entrepreneur, investor or crook. The crowd is more skeptical than ever before. And only those entrepreneurs that are transparent and accountable will be successful in raising capital, forming businesses and hiring Americans.

However the naysayers are surfacing.

  • A number of them can be dismissed because they do not want another competitor in the capital markets. (Our response to them is, step up to the plate and fund our nation’s entrepreneurs at the same degree or better than prior to the financial meltdown).
  • Another group are just naysayers with no solution, just vague fear mongering with little data.
  • And the final group is the conspiracy theorists that believe (with no hard data) it will open the floodgates to fraud. We adamantly refute this.

First, naysayers need to understand the framework and rules under which we are proposing CFI to take place. An entrepreneur wishing to raise capital would have to:

  • Submit to a background/fraud check (name, address, social security and date of birth) to ensure he hasn’t committed fraud.
  • He would have to pitch his idea on SEC-registered Crowdfund Investing platforms.
  • These platforms will be required to perform the fraud checks and contain an investor education component.
  • Investor education and terms of service will warn investors to only invest in people they know, products or services they believe in, entrepreneurs whom they can talk to about the idea and only those ideas that have the greatest number of 1st degree connections. eg: You can feel confident backing an entrepreneur with 89% first degree (meaning they know him personally) investors that represent at least 89% of the committed capital. However, you should be skeptical of an entrepreneur that only has 24% first-degree backers and they have only ponied up 10% of the amount needed. All of this is easily tracked and graphically displayed with standard web tools.
  • The platforms will enable open dialog where potential investors can pick apart the idea, the entrepreneur’s experience, the business model and the amount of equity offered. The entrepreneur will have to respond to each of the comments to the satisfaction of the crowd. The crowd will vote on the answers by using the “like” button. A higher number of likes the more confidence investors will have again. If an entrepreneur doesn’t answer the questions to the satisfaction of the crowd he/she won’t be funded, period. Again all of this can be tracked and graphically displayed for potential investors to see.
  • Our proposal is an all or nothing financing window. If a fraudster is trying to bilk people out of $1M and he hits a funding target of $999,999.00 he won’t be funded and no money will be exchanged. Anyone who is trying to raise capital will have to set small milestones and raise smaller amounts of capital, hit their milestones and go back for more with proof that they’ve achieved what they said they were going to do.
  • Of course, they will have to be transparent and communicate with their investors or again they won’t have the confidence going forward to raise additional money.
  • Another trigger will be the percent of 1st round investors that come back for a second round. The higher that percent the more confidence. The lower, the less likely they will raise additional funds.

So still think fraud can take place with all these triggers? If so, give us the example and let’s work it thru the model.

ps – Remember, this exemption is not be available to foreign issuers, investment companies, and public companies.

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Categories: Crowd Fund Investing · Sherwood Neiss · Woodie Neiss
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