Clamour for regulation raises doubts over wisdom of crowdfunding
The use of the web to drum up funding for ventures has caught the popular imagination. Crowdfunding platforms such as Kickstarter, Seedrs and Indiegogo have helped inventors and campaigners raise billions of pounds for concepts that would not otherwise have been funded.
But it could not save the New York City Opera. This 70-year-old Manhattan institution, which had been struggling for many years, turned to crowdfunding to raise $1m through a 22-day Kickstarter campaign.
Even if it were successful, this would have barely dented the $20m that the organisation estimated it needed to fund productions for the rest of its 2013-14 season. In the end, the Kickstarter campaign gathered commitments of only $301,019 by the September 30 cut off, meaning that the Opera doesn't get any money from the project's backers.
"The people's opera" filed for Chapter 11 bankruptcy on October 3.
The problems caused by failed crowdfunding campaigns are likely to become a lot more public. Although UK-based Seedrs is an equity crowdfunding platform, its much larger American counterparts Kickstarter and Indiegogo have to date only allowed people to donate money through their platforms because offering shares has been illegal in the US.
This will change now that the Securities and Exchange Commission, the US regulator, has proposed rules to govern an equity crowdfunding industry. The UK's Financial Conduct Agency has said existing rules can be adjusted to regulate that market. Consultation on its plans to do so ends December 19.
Moving to equity investments is inevitable, according to Danae Ringelmann, Kickstarter's co-founder. "It will be messy," she says. "We have got to figure it out."
According to John Mullins, associate professor of management practice in entrepreneurship at London Business School, the warning signs are already there from some entrepreneurs attempting to raise equity finance in the UK through crowdfunding.
"Much of the venture capital industry has a dismal record at picking companies to invest in, not to mention often delivering negative returns to their investors. It's unlikely that Aunt Millie will do any better, and she may not be very happy when she soon discovers that the crowdfunded investments she's made have all turned to dust. A backlash is likely, in my view."
The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused. > Early data on crowdfunding suggests that the average amounts raised are in the neighbourhood of