SEC Regulations Barricade The Crowdfunding Floodgates

SEC Regulations Barricade The Crowdfunding Floodgates
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Joseph Pulitzer used a form of crowdfunding to finance the Statue of Liberty. Obama used crowdfunding to bankroll his presidential campaign in 2008.

Crowdfunding is such a pervasive concept that today more than 175 crowdfunding sites exist online. Seemingly, a new crowdfunding site pops up every other day. So it may be surprising to learn that none of them allow entrepreneurs to raise money in exchange for equity in their business. That's because regulatory organizations like the SEC ban it.

SEC regulations that date back to the 1930's usurped entrepreneurs' ability to pitch their business ideas to the general public with the aim of securing funding. Ostensibly, this was done to protect unsophisticated investors from fraudsters, but in any case effectively handed the role of financing new companies over to the wealthy. These days, the regulations don't make sense given the Internet's ability to add transparency to the opaque venture capital model.

In the same way that social networking changed how we allocate time, crowdfunding will change how we allocate capital. Crowdfunding, generally speaking, is the merger of group funding and social networking. While group funding dates back millennia, the social networking aspects of crowdfunding are quite new, and are a major driving force behind this revolutionary form of financing.

Building on social networking, crowdfunding creates a vehicle for people to invest or pledge money to projects for which they have an interest, a passion and an attachment. In doing so, it creates a marketplace opportunity for a diversity of players. Whether financing an indie movie, a fashion line, an around-the-world sailing adventure, or the next Lance Armstrong, crowdfunding is being applied everywhere.

Still, the human race hasn't even come close to integrating the collective wisdom of our multi-billion person crowd with ways to allocate capital. 2 billion people already use the Internet, and that number is increasing rapidly. Until recently, capital allocation was largely the province of a small and entrenched minority. But with the explosive growth of connectivity and technological complexity, the classical models of capital allocation are folding and becoming dysfunctional. What are the weaknesses of old methods, especially the sheer scale of information and ideas, are the strengths of a new model of funding which has the potential to tap an almost unfathomable collective intelligence. Therein lies the immense future of the crowdfunding revolution.

Ironically, while nearly every other market sector has incurred disruption by new technologies, venture finance, which funds many of these new technologies, has innovated little itself. That shows in the downward-trending performance of venture capital, now negative across the industry.

In many ways, the financing of new ventures has shared ailments that we've seen in the banking industry: centralization and intermediation. The solution to these issues is decentralization and disintermediation -- exactly what crowdfunding offers. Whereas classic financing places a premium focus on relatively few financiers, crowdfunding derives its value from the ability to coalesce the collective IQ of many.

But that's not to say crowdfunding is a replacement for classic financing. It's actually something much bigger, and something new. In fact, nimble players, hailing from classic business financing, will use it as a signaling mechanism to access hot new deals they would have never seen. As exciting is the fact that the value of a person's social networks is undergoing an enormous upside transformation. That's because, as David Geertz of the SoKap crowdfunding platform says, "Influencers drive crowdfunding campaigns. These curators of cool ideas are poised to become the new power brokers." With crowdfunding, zero network equates to zero funding, so it follows that those with networking influence enjoy a new form of value.

Efforts are afoot in other countries to enable the massive potential of crowdfunding, recognizing that small businesses are the job-creation engine of the economy. In fact, crowdfunding looks to be one of the most important socio-economic forces of our time. The question is: Which nations will be held back by their unwillingness to change regulations?

I discuss a much deeper and broader look at the crowdfunding phenomena in my book, The
Crowdfunding Revolution
, and will continue with a series of related posts on The Huffington Post.

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