3 Things Millennials Need to Do to Make Crowdfunding a Success
As we get closer to the start of securities-backed crowdfunding (but don’t do it yet!) it becomes obvious that millennials are going to play a pivotal role in whether it succeeds or fails. It falls to you to make crowdfunding work, and here are three things you should do to help.
1) Make your voices heard by the SEC
While the JOBS Act has been passed much of the actual structure of the law remains to be determined by the Securities and Exchange Commission (SEC), a government agency more familiar with multi-billion dollar conglomerates than two people in a dorm. There is a danger that the SEC, in a well-intentioned effort to protect investors, will smother crowdfunding in regulations that do not reflect the reality of start-ups, small businesses, or modern technology. In talking to young entrepreneurs about the JOBS act I have seen how sensitive they are to the possibility that they will be prevented them from exercising the flexibility their young businesses need to survive because the SEC is thinking of their business the same way it thought of multi-million dollar companies in 1990. While investors must be protected, if the SEC overregulates crowdfunding both small companies and small investors could be frozen out, defeating the entire purpose.
Young people are in a unique position to educate the SEC on the advances in communications and technology that enable – and in fact require – companies to be able to pivot quickly. By providing this insight as both potential investors and entrepreneurs the SEC can feel more comfortable adopting regulations that work with crowdfunding’s unique nature, rather than just applying off-the-shelf regulations that don’t fit. The SEC is asking people to provide their opinion on how the SEC should regulate crowdfunding and millennials need to be part of that conversation. If you do decide to submit comments to the SEC, be specific. Don’t just say “don’t overregulate.” Read the statute and tell the SEC specific things they can do to help you.
2) Be smart about using crowdfunding
As an investor or entrepreneur you have the responsibility to participate in crowdfunding wisely. While the JOBS Act has certain investor protections in place, the investor remains their own best defense against being defrauded. Individuals will need to exercise discipline in doing their research and resisting offers that seem too good to be true. If crowdfunding becomes perceived as a haven for fraud it is possible that the government will snuff it out, denying small businesses and small investors this important tool.
Millennial investors in particular should be aware of the limits of certain type of research. Social media, Google, or Wikipedia can provide useful information, but can also be gamed or not include good investments who operate in less visible industries. Successful investors will use a broad spectrum of sources to evaluate companies, and demand transparency from potential investments. While crowdfunding lets you take an active role in supporting small businesses you believe in, it is up to you to take responsibility for your investments.
Entrepreneurs also need to be smart about using crowdfunding. It isn’t free money (just like your student loans); by selling securities you are getting operating capital at the expense of giving up part of your ownership in your business or taking on debt. The decision to raise money via the crowd can impact how your business can operate, what legal obligations you have, and whether you can obtain institutional (Angel, VC, or Bank) funding in the future. None of these issues are insurmountable, but you need to bear them in mind, because chances are the obligation you undertake may outlive the money you raise (again, just like the student loans).
3) Keep realistic expectations
I hate to be the one to tell you this, but crowdfunding isn’t the answer to all your problems. If you are an investor you probably aren’t going to “win the lottery” and invest in the next Facebook, if you are an entrepreneur you probably aren’t going to achieve world domination. Much more likely is that investors and entrepreneurs will make and lose modest sums of money as the fortunes of their businesses rise and fall, so don’t think you will be able to retire by 40.
Even if crowdfunding is unlikely to lead us into a utopia, it has the potential to allow small businesses and investors take more control over their futures and open our economy up beyond the control of the established incumbents, and that at least gets us a little closer to the promised land.