The JOBS Act of 2012 made legal room for a new kind of investing: crowdfunding. Think Kickstarter, but instead of getting a t-shirt, you’re buying a piece of a company. After a year and a half of deliberations, the Securities and Exchange Commission meets today to consider regulations for crowdsourced venture capital.
These rules are for small-time investors — people without a few million bucks to burn. One concern is how the SEC can protect them from con artists.
The good news is that fraud is rare in crowdfunding, says Richard Swart, a partner at Crowdfund Capital Advisors, because the platform itself makes fraud more difficult.
“The crowd seems to be able to detect anomalies within a few hours,” he says. “Twelve to 15 hours is common. The campaign will be flagged for review.”
That’s the good news. The bad news is, even without bad faith, the risks are huge.
Start-up investing means trying to pick the next Twitter or Facebook out of a field of thousands.
“Those are very, very rare companies. You know, there’s two of those minted a year,” says Naval Ravikant, co-founder of Angel List, a company that already does crowdfunding with high net-worth investors.
“If you have 50 investments and two of them turn out to be big hits, you’re doing way above average,” he says.
Those hits make up for the money you lose on the others. “In most cases, you lose everything,” he says. “Your entire investment.”
That’s right — you don’t even get a hoodie.
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