Epic Battle for the Soul of Crowdfunding

Donation-based crowdfunding has already shown the ability to amass millions in short amounts of time for small groups of people.  Soon its more materialistic counterpart, equity crowdfunding, will become legal, and as Locavesting author Amy Cortese has noted (as reported by Tim Rowe and based on the Flow of Funds Matrix totals for Households and Nonprofits), if Americans diverted just one percent of their long-term savings to this kind of investment, it would total 10 times the amount that VCs invest in U.S. companies.

The new law defines the commercial entities ("funding portals") through which crowdfunded securities must be sold. These companies will be overseen and regulated by the SEC and FINRA, and it seems natural that they should also have an industry association, as do other billion-dollar industries, to help the industry grow and stay out of trouble, to lobby lawmakers (hopefully in a good way), and to run conferences and road shows, publish reports, and do other things to foster education and interaction around crowdfunding.

Whoever leads such an association will be in a powerful position, guiding an industry that has a new, federally-mandated foothold to challenge Wall Street for the first time in generations.  If all goes as planned, crowdfunding will enable innovative small businesses and communities to bootstrap themselves up in a way that keeps all the funds local or within a connected community of interest, bypassing the established investments-industrial complex entirely.

If, come January 2013, the SEC has implemented the crowdfunding exemption in a way that's usable and attractive to small-scale entrepreneurs, I would expect Wall Street to counter the threat by spreading FUD (fear, uncertainty, and doubt) around crowdfunding. This should fail, because most people will believe what they see in their own communities with their own eyes before they believe any horror stories placed in the media. (Note: the leading crowdfunding sites RockethubCrowdcube, Prosper.com, Funding Circle, and AngelList all report zero fraud throughout their entire histories, and no CF sites that I know of have reported any cases of successful fraud, although I'm sure it will happen.)

But an established equity crowdfunding industry will be constantly susceptible to corruption and influence from the Wall Street-based retail investments industry that it competes with. That's why I believe that if the crowdfunding industry is going to succeed, it needs a leadership that's ethically untouchable. Otherwise, powerful forces will be able to buy it out and render the industry ineffective.

Unfortunately (but not surprisingly), I have also noticed what I perceive as some opportunistic and unsavory elements drawn to crowdfunding.

Three Groups Vie for Mindshare and Membership

I know of three groups that are claiming legitimacy as the professional organization dedicated to the young crowdfunding industry.  It's an entertaining situation, seeing all the jockeying for position, but I believe that what happens is also very important to our future. BusinessWeek recently covered the rivalry between two of these org's, the NLCFA and the CFPA. I was glad to see this article, and the story got picked up by other pub's, but honestly, I think the reporting was on the superficial side. (NLCFA Executive Director David Marlett has posted his list of inaccuracies at the bottom of this page.)

This is interesting stuff-- everyone loves a battle-for-leadership story-- and it needs to get out there and be processed by (yes) the crowd. My current take on the situation and the main players is below, but it's been changing with each new person I talk to. I would love it if journalists, bloggers, or anyone else out there wanted to dig deeper, and help us all explore who's credible, what each group's plans are, and even whether it matters that there are multiple competing organizations claiming to represent the CF industry (I believe it's bad, as blogged here before). In my experience, the people in this field are pretty accessible-- you can just call them up or email them, and they'll probably be happy to communicate.

Crowdfunding Professional Association (CFPA)
This is the group that I have the most allegiance to, and (full disclosure) I've been talking with them and may soon hold an official position there. It started as a sister organization to the "leadership group" (now CFIRA) that was cited by the White House when the JOBS Act (which legalized equity crowdfunding) was signed. The group, many of whom had advised the White House on crowdfunding previously, wrote a letter to President Obama outlining how it wanted to help the SEC with its CF exemption rulemaking.

The CFPA's strong history with crowdfunding and position in DC make it automatically credible, but it's also been a largely volunteer effort, with limited time and resources thus far to do things like build up membership, forge alliances, build a credible website for itself, put out press releases, and do other things that would help it help the industry. I see it as a chicken-and-egg problem, but I also know that the CFPA has some interesting plans afoot that will help.

National Crowdfunding Association (NLCFA)
This is the group founded by former securities attorney, filmmaker, and immigration law enforcement activist David Marlett.  As I explained in my last blog post, this entity put out a press release three days before the JOBS Act was signed, announcing the organization, announcing Marlett as its executive director, and describing it as "the professional organization of all companies and individuals with an interest in crowdfunding." This was a discussion topic among several people who were at the White House with me for the JOBS Act signing, since they had never heard of Marlett or the NLCFA before, and they saw that the NLCFA site linked to pages that sported their logos without their knowledge or consent, in a way that they felt implied their membership. In response comments to my post, Marlett clarified that it was his consulting firm's website that included these logos, as a service for people wanting to know what portals were out there, and the pages were removed because he is no longer pursuing his consulting firm.

I did some cyber-stalking and came across a blog on film finance that Marlett had written for MovieMaker through 2009. In his final post, he describes his vision for a film production cooperative that would both produce and distribute its films. It's a great idea, and it demonstrated to me that Marlett genuinely has been thinking about crowdfunding for a while, and is not just trying to jump in now because he heard about the JOBS Act and the Pebble and sees a new way to become an alpha male. Reading his MovieMaker columns, I really like his attitude and candor, and I can't help but think, sadly, why did he have to come to our attention in such a scheming, detached, and adversarial way?

The NLCFA has been putting out press releases, attracting partners, and establishing Marlett as the crowdfunding industry authority in the press. Marlett says that the NLCFA also expects to offer health insurance by the end of this year, which would be a great service. As he also states in his comments here, he wants his organization to be judged by its actual work, rather than what it says about itself, which is a great point.

Marlett took issue with an earlier version of this post (which I sent to my mailing list two days ago) and I hope to talk with him soon to gather more current information on the NLCFA's activities. I look forward to reporting it here.

International Crowdfunding Association (ICFA)
I also mentioned this group in my last post, and noted their 8pm kickoff meeting at a hotel near Las Vegas on May 24th. The organization is backed by Sprowtt, a company that formed in 2008 to enable small companies to go public and was listed in the Crunchbase deadpool in 2010 as no longer active, and CEOSpace, a "CEO on line Collaboration" website run by Berny Dohrmann, whose unconventional career has included being convicted for securities fraud in 1995. Former SEC Commissioner Roel Campos is also helping the ICFA, and ICFA founder Mark R. Jones emailed me that the organization has 4 attorneys on its board who used to work at the SEC.

Jones, who is also the founder of eCinema Networks and has nearly 5,000 Facebook friends, told me that 500 people attended the ICFA launch, and I heard second-hand that David Marlett was seen storming out of the event (but according to Marlett, he wasn't there).

That's what I know at this point, but I would love to find out more. My feeling is that the CFPA is the most credible organization, with the right people, the right values, and an established history with crowdfunding.  But if in a couple of months they seem to be behind in the battle for credibility and substance, then I wouldn't blame anyone for joining the NLCFA or any other organization that inspires more confidence.

I will leave with a quote from a recent interview with Clay Shirky on crowdsourcing.org:

[T]he thing I’m most bullish about regarding the JOBS Act [...] is that this method of aggregating demand isn’t a new way to do the old stuff; it is a new model of the business ecosystem, full stop.