Crowdfunding is an innovative idea. But like anything that promises to be a game-changer, it has both benefits and drawbacks that need to be considered.
On the plus side, many people would like to be able to assist a friend or neighbour launch a new business, product, or idea, help someone in need, or pre-purchase the latest innovative product, such as the Pebble smartwatch - and crowdfunding can do just that. These are all examples of good crowdfunding.
However, the deregulation of securities laws to allow anyone to make investments via equity crowdfunding is like the Titanic heading into iceberg alley. Equity crowdfunding abandons fundamental principles that have made Canadian markets among the most successful at raising risk capital, including full disclosure, due diligence, insider regulation and the role of a professional financial advisor. These are the negatives of crowdfunding.
Crowdfunding combines the ease of technology with the promise of potential lottery-sized winnings. However, in a lottery, there is a regulator that ensures the integrity of the system, including money coming into the lottery and money paid to vendors and to winning players. Deregulated securities rules will not prevent crowdfunding from being a rigged game.
This story first appeared as an Inside Track op-ed in the online version of Investment Executive.
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