Here’s Why Crowdfunding Rules Don’t Work

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It’s a generally accepted theory of economics that small businesses are the fuel that keeps an economy burning. Crowdfunding has an amazing opportunity to add additional fuel to that fire, but only if the rules and regulations support adding that fuel. If one looks at the UK market and what crowdfunding has been able to accomplish, the results are very clear. Crowdfunding works.

The only problem is that not every nation is taking the same approach as the UK. The truth is that when it comes to crowdfunding, the UK is more of a lone wolf. Most nations are trying to put old regulations onto a new funding platform. That doesn’t work. A new method of raising capital deserves new rules and regulations and that’s why most crowdfunding rules today aren’t working.

What Can Be Done to Change This Trend?

What companies and backers need today is support. People should be encouraged to take risks when it comes to investments, but smart risks. Companies should be encouraged to bring about new ideas to the marketplace, but functional ideas that actually have value. When these two attitudes are combined, there can be something amazing created with the relationship that is formed.

The only problem is that this relationship is discouraged more often than it is encouraged.

Take, for instance, some of the proposed rules in the US for equity fundraising. Some companies would be required to file full disclosures to their crowdfunding backers as if they were putting together an IPO for the stock market. For a small business with 3 employees, is that really something that is feasible to do? Couldn’t there be a better method developed that will support the small business and encourage growth?

Crowdfunding can’t just be about the funding. It has to be about the entire ecosystem.

Today’s Rules Just Don’t Make Sense

The issue that must be addressed is how the regulations apply to the businesses who are entering into the crowdfunding world. When people understand the risks of being a backer, then the marketplace will naturally begin to regulate itself. As it stands now, however, the new regulations that are being introduced in most nations are completely separate from the environment where they are expected to operate.

It’s a lot like asking someone to play baseball, but then give them the rules on how to play cricket. It seems like it will work at first, but once you start playing the game, no one really knows what they’re supposed to do.

The fix for this is simple: to match regulations with the types of backers that are emerging from this new market. Rules should be about common sense instead of being based on what was common sense for older markets. We need to recognize all aspects of the investment and equity process, including sweat equity, to have a true evaluation of how capital flows today.

The delays in rules implementation in the United States could be a blessing in disguise. It gives the US a chance to create a more holistic approach, something that individual states are starting to take up on their own. The UK has shown that this can work. Now it’s time for the rest of the world to catch up.