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Interview: SEC's new "crowdfunding" rule innovative, but with risk: scholar

English.news.cn   2013-10-24 13:13:54            

by Jiang Hanlu, Liu Fan

NEW YORK, Oct. 23 (Xinhua) -- A new rule proposed by U.S. regulators to allow business startups and small businesses to raise capital over the internet from the general public is "a true game changer," a local scholar said Wednesday.

"I think the overall idea is a good one that it would allow entrepreneurs to raise capital in a much broader way than previously possible by widely advertising their project," said Anindya Ghose, a professor at New York University's Stern School of Business.

"In a sluggish economy, this makes a big difference. Direct solicitations through social media and internet definitely raise the scope and scale of crowdfunding," said Ghose, who is also the co-director of the Center for Business Analytics at NYU Stern.

The U.S. Securities and Exchange Commission (SEC) on Wednesday voted unanimously to propose a rule under the Jumpstart Our Business Startups Act (JOBS Act) to allow companies to offer and sell securities through crowdfunding, an evolving method of raising money through the internet.

Private companies currently are only permitted to solicit accredited investors, those with a net worth of at least 1 million U.S. dollars, excluding the value of their homes, or annual income of more than 200,000 dollars.

But under the proposed rule, a company would be able to raise a maximum aggregate amount of 1 million dollars from unaccredited investors in a 12-month period.

Commenting on the proposed rule, SEC Chair Mary Jo White said: "There is a great deal of excitement in the marketplace about the crowdfunding exemption," adding that "We want this market to thrive in a safe manner for investors."

Ghose explained that crowdfunding offers enormous potential because it is rooted in the concept of crowdsourcing.

"We are tapping into wealth of the crowd," he said.

Crowdsourcing can tap into the crowd's wisdom "because the crowd evaluates and selects projects for funding. And following funding, the crowd will often provide feedback and suggestions to the fundraiser on how they should implement their product or service, and become evangelists, promoting the product or service to see it succeed," the professor said.

Despite many merits of crowdfunding, Ghose also warned of a possible downside to this novel investment form should it be used improperly.

"Crowdfunding is supposed to help the average Tom, Dick or Harry raise funds for projects for which banks and financial services firms refuse to give them loans," Ghose said.

However, if celebrities, who tend to have much larger social networks and fans than the average entrepreneur, abuse these platforms to create awareness and raise funds for their own projects, "I worry that the average entrepreneur's share of crowdfunded dough can rapidly dwindle as more and more cash flows will migrate toward celebrity-endorsed or -owned projects," Ghose said.

Besides, Ghose suggested that the U.S. government have to do more with prevention of fraud in crowdfunding.

"The SEC is working actively toward it. This will be even more relevant when equity crowdfunding comes to play in the U.S.," he said.

The SEC is seeking public comment on the proposed rule within 90 days.

Last year, 308 crowdfunding platforms across the world raised 2.7 billion dollars, an 81 percent increase over the amount raised in 2011, according to a recent report released by Los Angeles-based research firm Massolution.

And the amount is expected to reach 5.1 billion dollars in 2013, the report said.

Editor: chengyang
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