Robert Shiller is worried about crowdfunding.
But the SEC could do more than just avow its belief in “uncensored and transparent crowd discussions.” It should require that the intermediary sponsoring a platform install a surveillance system to guard against interference and shills offering phony comments.
Pointer from Mark Thoma.
Amateur investing in start-ups is per se a really bad idea. I did it a few times as an “angel investor” and got screwed. Founders made promises to me about how they would handle finances, and they quickly broke those promises. And once, when the start-up managed to do well, the founder obtained follow-up funding that amounted to legal blackmail against those of us who were early investors, so we got nothing. I came out of that experience convinced that unless you have top-notch lawyers working with you, investing in start-ups is a no-win game. As a small investor, you would need to score a home run just to cover your legal bills.
I see two possibilities for crowdfunding.
1. Suppose that people are only asked to invest in companies where they want to buy the company’s offering. Then, it seems like an interesting way for start-ups to do early market testing.
2. Suppose that the crowdfunding platforms provide some of the legal protection that venture capitalists and other high rollers are able to give themselves against subsequent misbehavior by founders or follow-on financiers.
If one of these, or preferably both, are in place, then I think that crowdfunding could last. Otherwise, I expect it to produce very negative average long-term returns and die a natural death.