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Injecting Credibility and Accountability into the Equity Crowdfunding Industry

7 Feb

How a Crowdfunding Audit Bureau Could Give the Crowdfunding Industry Instant Transparency

By Robert HoskinsCrowdfunding Press Center

While most of the Crowdfunding industry is waiting to see what type of guidelines the Securities Exchange Commission (SEC) will issue for Title II, Reg. D accredited investors, it would be a good time for the Crowdfunding industry to start discussing a list of recommended solutions that would make it easier for the SEC to roll out some proposed rules for Title III unaccredited investors.

The Crowdfunding industry needs to start sharing their thoughts on exactly what hurdles are preventing the SEC from issuing the Crowdfunding guidelines in the news media so that everyone in the industry can put their heads together and come up with a creative solution that will make everyone happy.

The average American has no idea how to look up items placed on a Government docket, much less get involved in filing public comments with the SEC to help steer the public policy decisions that will be made soon for the Crowdfunding industry. One thing that would be helpful in bringing the general public up to speed on Crowdfunding is to begin holding open meetings that include journalists, industry analysts and industry experts from other industries that have well established sales, distribution and venture capital investment channels.

There are many venture capitalists and angel investors that have been working in the high-technology industries such as security, application development, data mining, data warehousing, wireless mobility and social networking channels that would make great speakers for these events and could provide a wealth of information that would benefit up and coming Crowdfunding Service Providers (CSPs).  Not only would these types of events be good for networking, but they would generate lots of positive news coverage.

The more informative new articles that are shared via mass media outlets, the quicker the momentum will begin to  pick up for the Crowdfunding industry.  The Crowdfunding industry really needs to work closer with experts in the information technology and computer networking hardware industries to start publicizing how various flavors of technology can be harnessed to resolve many of the industry’s concerns.

For example, most people, including the media, seem to think that the SEC is extremely worried about the opportunity for fraudsters, but in reality, they are probably a lot more worried about how much money and how many employees they will need to police 10,000 Crowdfunding portals.  Or how will they regulate the 226 million potential investors that are 18 years or older in the United States that are only allowed to donate a maximum of $2,000 per year to Equity Crowdfunding platforms?

Some great ideas that have already popped up on the radar screen for consideration include crowdfunding credit checks, credit bureaus and accreditation credentials.  The problem is that most of the technical details for how these ancillary businesses will conduct their operations has not been made public or talked about in the industry trade press. Portals and eCommerce centers have been around for a long time and the technology to automate and ensure security is very mature.

Another tool  that has not been talked about yet, but has served as a very useful role in the advertising industry might include establishing a Crowdfunding Audit Bureau that audits a Crowdfunding Intermediary’s subscribers.  Audit statements have been used by print media buyers for decades to determine whether or not a publication was worth investing $25,000 to buy an advertisement to reach a specified target audience of potential buyers. Why not audit a Crowdfunding intermediary’s investors?

Audit statements served as a very useful tool because they broke down the publication’s subscriber’s demographics and presented the information in a standardized format that made it very easy to compare one publication’s subscribers versus all of their competitors on an apples to apples comparison. Crowdfunding Audit Statements would hold Crowdfunding sites and their investors accountable for the integrity of their data and put the burden of monitoring 10,000 Crowdfunding industry portals on a non-profit organization, not the SEC.

Using Crowdfunding Audit Rules each intermediary would publish a Crowdfunding Audit Statement, which is then audited by a non-profit, third-party vendor.  This process would make it fairly easy to keep track of the industry and its players. Audit statements would allow new intermediaries and the SEC to analyze in great detail what type of investors and investments each portal was generating by looking at the demographic, psychographic and financial characteristics reported for its subscriber base via the audits.

There are several auditing organizations that have been around for many years such as the Alliance for Audited Media or Business Publications Audits (BPA) Worldwide that were originally setup to audit statements from newspapers and magazines so that advertising agencies could analyze that value of a publication’s target audience before investing millions of dollars to advertise to reach their respective readers.

Audit statements were not required by the government, but they served a very useful purpose. Without an audit statement a media buyer always knew immediately that buying advertising in that publication would not be worth the risk. So why not implement a Crowdfunding audit system what that would allow investors and Crowdfunding campaign managers to select Crowdfunding intermediaries based on their audit statements?

Using qualification forms similar to old-school business reply cards, all Crowdfunding intermediary members should be required to fill out in-depth qualification forms that ask many questions related to what type of investor they are, what types of investments they are seeking and how much investment capital they are authorized to make during a given calendar year.  Other questions could probe into what type of company they work for, what vertical business segments they have experience with,  their job function and title,  yearly salaries, etc.  Call centers using data warehouses and financial data mining techniques could then verify the validity of this information.

Crowdfunding sites like Kickstarter are already doing a good job at reporting what industry segments are using their sites, what industries are receiving the largest Crowdfunding donations, as well as what industries have the highest success rates, but they really don’t provide much information on the pool of Crowdfunding donors/investors their site retains. With Kickstarter this is not really an issue, but for the hundreds of smaller Crowdfunding sites knowing for sure what pool of donors/investors they have in their subscriber databases would be great information to have in order to make a wise Crowdfunding campaign decision.

In addition, audit statements should go into great detail about how a Crowdfunding site generates their investor base.  Did investors sign up because the site is a leading Crowdfunding platform, or did the site offer them a free tablet to join their ranks?  A site with 20,000 serious investors that are there to invest will provide a much better return-on-investment than a site with 1,000,000 amateur investors that only signed up to get a free prize.

Among other things this process would shine a light on the rise and fall of registered investors per site, the platform’s success rate for Crowdfunding campaigns as well the growth rate by industry, average investment size and percentage of accredited investors versus unaccredited investors.  Perhaps Crowdfunding intermediaries should be required to exceed a 50-percent or better success rate for their campaigns by providing Business Partner Programs to provide professional assistance and improve investment performance ratios.

Using an audit statement process also would make it easy to educate investors and Crowdfunders to always ask Crowdfunding intermediaries for their Crowdfunding Audit Statement in a similar manner to how car buyers have been trained by the media to request a CarFax before buying a used car. Not having a CrowdFax Audit Statement would be a very easy way for inexperienced investors and Crowdfunding campaign managers to recognize sub-standard Crowdfunding platforms.

Everyone seems to have a general consensus that Crowdfunding will be extremely beneficial for the America economy because it will provide startup capital to millions of new and existing businesses where none has been available for the last five years. So it would be in the Crowdfunding industry’s best interest to do a better job at publishing whitepapers and industry research reports that detail how leading technology and standard operating procedures can be used effectively to protect all entities from fraud.  Instead of blaming the SEC for moving slowly, we should make their job easier by recommending relaxed, but fair rules that facilitate the ability for 98% more Americans to start investing in our future by placing well-thought-out Crowdfunding investments and receiving a good return-on-investment.

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