crowdsourcing IPOS are on the way

new SEC crowdsourcing rules…

Last year’s JOBS Act (Jumpstart Our Business Startups) made them possible.  To my mind, abuse of organizations like Kickstarter made them necessary.  But the prior Obama SEC chairman, Mary Shapiro–a really weird choice for a financial watchdog–declined to write rules enabling them (a previous head of the brokerage industry trade association, she also declined to prosecute anyone in the financial industry for causing the Great Recession).

Under the current chairman, Mary Jo White, the SEC is beginning to function again.  Last week, it completed a set of rules for public equity offerings through crowdsourcing rather than conventional  high-fee broker-led IPOs.

Generally speaking, the rules require online availability of offering documents that potential investors can peruse and set limits on the amount an individual can invest, based on his assets.

…solve some problems…

For one thing, the JOBS Act requires the SEC to write rules for crowdsourced IPOs.

For another, crowdsourcing has become a big business.  But up until now, there has been no way for a crowdfunder to offer–or contributors to demand–an equity interest in his project.

For example, according to Varietyfilmmakers have already raised almost $120 million for movie projects through crowdsourcing.  What do contributors get in return?   …DVDs maybe, or thank-you notes, or autographs.  In other words, not much.  Arguably this is the way the film industry traditionally works, but still…

The recent case of Zach Braff of Scrubs fame has been particularly irksome to crowdfunders.  He appears to have pocketed $3 million+ in Kickstarter money raised for a small “independent” movie, and then turned around and sold his film idea to a studio anyway.  Ouch!

…and created others

There are the obvious issues of possible fraud and of the adequacy of disclosure.

In addition, like angel or venture capital investing,

–these will be long-term projects, so investors will have to be patient,

–the failure rate will probably be high

–crowdsourced stocks will presumably be highly illiquid.  A marketplace for trading them will probably eventually develop.  Let’s hope it will be better than the pink sheets.

on the other hand…

Had crowdsourcing been available, my guess is this is the route Google would have chosen to go public, rather than through a conventional IPO that mostly benefits Wall Street insiders.

The chances of a payoff, however small they may be, are certainly better than the odds on a lottery ticket.

And who knows?  …crowdsourcing may lead to an invigorated equity culture that appeals to Millennials.


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