Until now, selling equity stakes has been limited to so-called accredited investors, people who presumably have the wherewithal and sophistication to know what they are getting into.
Crowdfunding opens the field to the general public, and critics worry the newcomers may not adequately understand the risks involved in sinking money in a untested company.
Enter crowdfunding supporters such as the Crowdfunding Professional Association, a trade group for entrepreneurs, lawyers and investors. The organization is preparing to launch a Global Crowdfunding Education Network, intended to provide online classes and legislative updates for investors and entrepreneurs looking to participate in crowdfunding.
Some individual crowdfunding platforms — sites on which the public will be able to buy stakes in start-ups — offer their own investor education resources, though some consumer organizations fear these resources are too basic to appropriately communicate the risks of crowdfunding investments.
Sites such as Los Angeles-based site crowdfunder.com, have a Web page dedicated to describing legislation, elements of successful marketing campaigns, and other topics. Others — like EarlyShares, a Miami-based crowdfunding platform — have launched larger investor education initiatives.
EarlyShares recently rolled out EarlyShares University, a series of videos and Web pages dedicated to guiding investors and entrepreneurs through the risks, legal implications, and valuation processes for crowdfunding. Specific topics include the JOBS Act, the investment process, due diligence, common stock, risks and returns and diversification. EarlyShares promotes its educational material online as a “free service designed to help investors and business owners take full advantage of crowdfunding.”
The educational resources are intended to introduce the concept of crowdfunding to a new audience, not to promote the platform itself, according to EarlyShares chief executive Heather Schwarz-Lopes, though she noted that it could potentially increase the investor base.
“The more people know, the more comfortable they get with crowdfunding, the more they’ll understand what it is, and the more comfortable they’ll feel investing in these offerings. It’ll increase our investor base,” she said.
For example, in a video entitled “The Investor’s Role”, Schwarz-Lopes explains the difference between crowdfunding and traditional investing.
“Tradtionally, an investor’s role after they have invested in a company is determined by the amount and type of ownership the investor has in that company...Equity crowdfunding thrives on every crowdfunding investor playing a critical role in the success of a company regardless of how small the investor’s ownership may be,” she said in the video.
Some found the information to be lacking. Barbara Roper, director of the investor protect at the Consumer Federation of America, regarded the material on EarlyShares University to be too basic to be of real use to investors.
“[It] was completely devoid of any information that would actually educate an investor about the risks of investing in start-ups or how to analyze these business opportunities,” she wrote in an e-mail.
“All I saw was some boilerplate warnings about the need to read documents carefully -- but what documents, looking for what information?”
Investor education is a work in progress, according to Schwarz-Lopes. “The material live now on EarlyShares University is the tip of the iceberg, and we have plenty of informative, in-depth tutorials to come,” she said in response to such criticism.
Schwarz-Lopes noted that until the SEC releases clearer guidelines about how much investment advice a crowdfunding platform can give to its users, the most important takeaway for investors is that “early-stage investing is not a get-rich-quick gimmick.”
She’s also building a rewards program for entrepreneurs and investors who use the educational resources, providing them with points or giftcards.
But skeptics like University of Mississippi School of Law Professor Mercer Bullard, who specializes in securities law, question how meaningful any crowdfunding education can be before the SEC’s regulations are public. As of now, he explained, it’s unclear what form crowdfunding will actually take, and what information about offerings crowdfunding platforms and entrepreneurs will have to provide to investors under the regulations.
“There’s a woeful naivete about the risks of securities regulation,” he said.