Tag Archives: Socially Responsible Investing

Screw the Casinos: Crowdfund Equity!

Aside from the Presidential race, this year’s Maryland ballot included a number of important initiatives, including legalization of same sex marriage and the DREAM Act to allow illegal immigrants to attend college. One of the ballot initiatives, however, really got me worked up, specifically, Proposition 7 to legalize gambling in Maryland.

The proponents of Prop 7 ran (over and over again) an ad asking us to vote for Prop 7 to “keep $500 million in gambling revenue in Maryland, not West Virginia”. In other words, a classic “beggar Peter to pay Paul” strategy. West Virginia has plenty of problems of its own, it doesn’t need to lose $500 million and thousands of jobs to Maryland.

More to the point, I really don’t want to see Marylanders gamble away $500 million in casinos anywhere! One night of fun and your money is gone. Where’s the upside in that? As long as we’re ok with the notion of gambling and risk, let’s put money into crowdfunding equity instead. $100 here, $50 there – not a lot at the poker tables, but collectively enough to spark new businesses. Expect that you’ll probably lose your money — most startups fail — but then again, you and the US economy just might hit it big. Put your $100 on the table, follow the crowdfunding campaign and the company launch and see what happens. If nothing else, you’ve gotten months more entertainment from your money than a night at the casino could provide.

The SEC is worried that operationalizing crowdfunding equity represents too much risk for Joe or Jane Citizen. If Joe and Jane want to take risks that don’t harm others, why should the regulators say no? Alcohol and tobacco are legal, gambling is legal in some states and food consumption, even to the point of obesity, is legal too. Betting on business ventures, however, would be too risky. What kind of twisted logic is this?

Let’s face it. If we’re really going to kickstart economic development, job creation and social change through new business models, lots of things are going to fail to thrive in the process. If we want to foster a culture of innovation, however, we need to fund more businesses with the understanding that only a handful will survive and expand. We also need to kill the failures quickly and move on. No use crying over spilled milk, as the saying goes.

The flip side to asking regulators to let adults invest in small startups is that socially responsible startups must be mindful of the trust implicit in an equity investment and “take care of the little guy” in follow-on capital raises. Aside from being the right thing to do, ensuring that crowdfunding investors aren’t diluted into oblivion is a good way to demonstrate that social responsibility isn’t just something you talk about, it’s a value that you apply to all of your business actions.

Regulators should frame compliance regulations around the information that management and shareholders need to understand company operations, the software and human capital that these resource-constrained startups will have available and the overall cost of compliance. A perfect compliance system that’s too expensive and costly for new businesses may protect retail investors, but it does so at the expense of business and job creation. Balancing well-meaning, although perhaps misplaced, paternalism with the reality of economic conditions could bring a new level of practicality to compliance and transparency.

Yes, I know, many of you would prefer that I not lump casino gambling and crowdfunding equity into the same risk bucket. Let me be clear, these are two very different animals, although both are high risk. The upside to casino gambling is a bunch of low wage jobs that offer no professional advancement. The upside to crowdfunded equity includes a financial return to the retail investor, more jobs and an ongoing stream of business tax revenues. I can’t pretend that crowdfunding equity isn’t risky, but only by taking the right kind of risks can we hope for continuous innovation and robust economic development.

Lauren A. Burnhill, @LaurenOPV