Crowdfunding involves a large number of people who are fundraising for a venture. This works by attracting a “crowd” of people to contribute to an online funding target by taking a small share in the business venture. In investment, this refers to crowdfunding equity stock purchases for business startups.
When President Obama signed the JOBS (Jumpstart Our Business) Act on April 2012, equity crowdfunding provided a way for people to participate in stock market investments without the need for a big capital. Fast forward to 2013, however, and the problems that shareholders face in crowdfunding are gradually being recognized. Two of these problems include:
- Fraud.Crowdsourcing investments are typically established on the Internet, which is also the breeding ground of many fraud cases. The Wall Street Journal writes that since the JOBS Act was signed, thousands of crowdfunding sites have been appearing online. A handful of these websites are investigated for “allegedly exploiting online fundraising to commit fraud,” while others are used by companies that only buy and sell Internet addresses.
- Gambling on unproven companies because of a lack of investment know-how. Crowdfunding attracts ordinary Americans to invest in business ventures, but many of these people may not have enough knowledge on investing. As a result, they buy a share from untested companies and eventually lose their money. “Crowdfunding will at best be good only for the entrepreneurs and middlemen, paid for by unwitting consumers who simply cannot know enough about the highly risky ventures or the highly complex venture investing process to make informed investment decisions,” writes Daniel Isenberg of the Harvard Business Review.
Equity crowdfunding may present a fantastic opportunity for small businesses and ordinary shareholders. However, the complexity of the investment process may cause individuals to lose money. Knowledge of investment and careful strategizing are therefore required for those who want to participate in equity crowdfunding.
The financial advisors of JSK Associates can help ordinary people in their investment concerns. Read more about asset management here.