" How does Crowdfund Investing work?
It doesn’t exist yet. But this is how we envision Crowdfund Investing platforms to integrate and work with Social Media.
1. An entrepreneur with an idea will go to a Crowdfund Investing platform.
2. This platform will be registered with the SEC as able to list ‘Crowdfund Investment opportunities.’ In order to be registered, the platform must contain certain social media tools. eg: comment fields, rating buttons (like & scale), education component with sophistication test using CAPTCHA (you can read what is on the screen but you need to type in the identical image to verify you understand) technology. It must also integrate with 3rd party background screening programs.
3. The entrepreneur will register with the platform using his name, address, telephone, social security number, & date of birth. He will pay to have a 3rd party background/fraud check run on him. Provided the report comes back clean and he has not committed any fraud he can proceed.
4. In order to proceed he will register with the crowdfunding platform thru his Facebook, Linkedin and Twitter logins. This will pull his personal information and his contacts into the crowdfunding platform. This is a critical component because these are the people from whom he will crowdfund — his friends, family & community.
5. The entrepreneur will develop his pitch which includes information about himself, why he is pursuing this idea, what problem it solves, how it will make money, what he will do with the money raised and how much equity he is willing to part with in exchange for the capital.
6. Once the pitch is live, the entrepreneur will contact his friends, family and community through the contacts that were imported into the system. This ensures that he is reaching out to his 1st degree connections.
7. The community will click on the link in his email which will tie them to the entrepreneur. They can read the pitch. There will be a comment section much like you see in Linkedin Groups whereby the crowd can create subjects and ask relevant questions under each subject. (eg: Under use of funds a question asked might be, “How are you sure that $x0,000 is the minimum amount you need? is it too little, too much, please explain.” For each question, an entrepreneur will need to answer. The answer will be visible to the crowd and the crowd will be able to vote their satisfaction with the response on a scale of 1 to 10. (Technology allows a user (tied to a login) to only vote once per answer). If the entrepreneur is not timely or transparent in his response, he will not win over the confidence of the crowd. Using comment fields, the crowd can expose any fraud or discrepancies they discover about the entrepreneur online.
8. If a 1st degree person knows someone else that they believe might be interested, they can share the pitch with them through the system. This is how 2nd degree people might get involved. When those 2nd degree people register with the system, technology can easily assign the relationship between the individuals so we know their relationship.
9. If the entrepreneur has convinced the crowd he is trustworthy, the idea is a good one and the investment opportunity is worth the risk, the crowd can choose to invest or not. They can choose to invest up to $10,000 or 10% of their prior year’s AGI, whichever is lower. (The average amount will be much less than $10,000. We leave $10,000 in there so that we cover a spectrum of people who can afford to give at different levels and not keep out the people with greater ability to fund). Prior to investing, investors must register with the system too and using CAPTCHA technology, pass a test whereby they acknowledge this is the riskiest type of investment, they may never see any return and if they do it might take years).
10. Only if the entrepreneur hits his funding target is the project funded. If he comes short of his goal, he is not funded. This is a form of investor protection that requires a minimum buy-in from all the backers before a project is funded. It raises the bar on meeting one’s funding target and forces an entrepreneur to strategically consider how much he needs.
11. Once funded, the entrepreneur and investors form a community whereby the investors are tasked with helping the entrepreneur succeed by sharing knowledge, experience and marketing power.
12. All information regarding who raised money on the platform (name, address & social security number), how much, how many investors, who they are and what each of them contributed is transmitted to both the SEC and State Regulators."
3) How are Investors Protected?
Disclosure and communication are the investor protection in Crowdfunding. Bad players are not allowed to participate and are screened out in the background check. The disclosure about who the entrepreneur is and how we identify him leads to accountability. The 1st degree nature of the relationships builds trust, transparency and accountability. The social media components also bring transparency to CFI. And the all or nothing financing forces the entrepreneur to think strategically as well as raise the bar against fraud.
4) Who is Against it and Why?
The opponents to CFI are the Regulators and Special Interests that are using the fear of fraud and investor protection to protect their territory and pocketbooks. Here is a linkto an article that exposes why fraud isn’t the problem. The reason we advocate preempting both State and Broker/dealer requirements is that we already advocate for sending data to both the SEC and State. Adding a bureaucratic layer at the State level will only burden the process, lengthen the time and increase the cost (as current regulation does). Broker/dealers are important in traditional financing because they vet a deal and market it to the public. (This can be a case for fraud as well. In 2010, more than 3,200 licenses of brokers and investment advisers were withdrawn, denied, revoked, suspended, or conditioned due to state action). In CFI, the crowd takes the place of the broker/dealer, an entrepreneur is responsible for the success of his campaign and no deal is funded until the crowd fully funds a deal. This removes the need to for broker/dealers and the expensive cost of their infrastructure and processes. Both regulation and broker/dealers provide a valuable service. Crowdfunding is an on-ramp to their services once the crowd picks, funds and backs winning ideas.
5) Who is for Crowdfunding and why?
407 members of the House of Representatives, The President, The US Chamber of Commerce, the Small Business Administration, The Small Business & Entrepreneurship Council, Steve Case (founder of AOL), and pretty much every entrepreneur in the USA. Why? Because you can have thousands of entrepreneurs with millions of ideas but without capital you can’t create one company or hire any employees.' (http://www.startupexemption.com/crowdfunding-101)