Why I am a sceptic on Equity Crowdfunding for retail investors


Equity Crowdfunding is in the cambrian explosion phase, with three drivers being a)  the change in regulation in USA (Jobs Act) and b) the lack of high growth tech public stocks to invest in and c) the push by central banks globally to incentivise us all to take more risk with our investments. I am all for innovation, but this one has a bad smell to me. Count me a sceptic (although I am bullish on crowd-lending and rewards based crowdfunding). 

Where are the customer’s yachts?

The sell side pitch for getting into early stage ventures is beguiling – Fortune, Fame & Fun:

  • You get a chance to buy into the next Uber or Snapchat before it goes public (because by the time these huge but still private ventures  finally go public, most of the value creation has already happened, which was not true when the Microsoft era or even Google era companies went public). Fortune.
  • You never had access before. It was a game for insiders. Now you get to play and the minimums are small enough. When the company goes public you will be seen to be the the brilliant investor who got in early. Fame.
  • You will be investing early in companies that will change the world that are run by amazing entrepreneurs. Fun.

Fortune, Fame and and Fun – what could be better?

Where are the customer’s yachts is an engaging book that can be summed up as “when Wall Street is selling, buyer should beware” or the old poker adage “if you don’t know who the sucker is at the table, it is probably you”.

This is not the same illiquid as your house

Sceptics have pointed out that these are illiquid investments, unlike public equities. The pitchers know how to handle this objection. Your house is illiquid, right? Well yes, but I have a reasonable shot at valuing a house (local comparable, rental value to price etc) but have no way to value Uber or Snapchat absent audited financials and absolutely no way to value the Next Uber or Next Snapchat venture in the garage phase. Early stage investing is hard, really hard. A pitch that makes it seem easy is going to end in tears.

Angel List is a game changer for an aspiring VC, not a shopping basket for consumers 

We have written frequently before about how Angel List Syndicates is a game changer (index to posts here). That is crowdfunding, but with a difference. Angel List Syndicates is a way for a first time fund to build a track record before raising money (the other way round to how it happens today) and that is a game-changer that will crack open the Permanent Aristocracy of VC). That will enable the retail investor to buy into Syndicates and that is better than paying 2 & 20 to get into a second tier fund or attempting to build a diversified portfolio by investing directly. Yes, crowdfunding sites can make the buy button as easy as Amazon or Uber, but the consequences of gambling with your pension or kids college fund to invest in startups are a bit bigger.

This is very different from being a direct lender on Lending Marketplaces

There is plenty of innovation that is democratising Wall Street. We track these ventures all the time under the WealthTech category. For example, we believe strongly that Lending Marketplaces (or P2P Lending, the difference is subtle but real) is creating a new asset class in Fixed Income. This is a market where smart retail investors have a relatively level playing field with the Wall Street professionals. Sure you can still buy bad loans and lose money,  but the data is there for you to assess the risk/reward. That is not true in early stage equity.

1,000 hairdressers could be a better bet than 1/1000 chance of the next Uber

Thinking you can find the next Uber or Snapchat is a mirage with odds of about 1/1000.

It might be better if we found a way to invest in 1,000 hairdressers (or restaurants or whatever, small businesses that make money but will never be big). However I have not seen anything that offers that.

Equity crowdfunding is totally different from rewards based crowdfunding (e.g. Kickstarter and Indigogo) where the bargain is well understood by the consumer (you love the product and want the psychic reward of being an early customer).

Fix Public Markets rather than create a parallel almost public market.

If we get a market in private companies that is regulated but not as regulated as public markets and we get exchanges where we can get liquidity for these illiquid private shares – don’t we have a shadow public market? Should we then not have audited financials? Oh wait, if we did that they would be public equities! Fixing public equities is a job for Smart Regulation that is tech driven not bureaucracy driven, but that is another story.  But fixing the public equities markets so that small companies can go public seems a better bet than creating an almost regulated shadow public market.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.


  1. Isn’t it mind-boggling that market forces are creating a larger Shadow banking business and a larger private securities business?

  2. This is a good argument but i think that more nuance could be added if you happen to write a series on this. A public market of equities is a deeply rigged in favour of big players. A firm is a firm whether it is single proprietorship one or private limited or a public limited company either listed or unlisted. There is almost no technical relevance of maintaining these separate categories. The simple reason behind this inertia is that regulators, plutocrats and nation-state have appropriated the entire intellectual capital around it. A terminal can handle not just thousand companies; it can handle a million companies too but paper-based systems of incorporation put a limit on how market connected a firm can be. The events like DAO are not a revolution rather they are rebellion against the rigged system. If a $100,000 company can go to the market without much of legal and regulatory hassles of fiat currencies, things would be far better but fiat currency elites don’t seem to be mending their ways unless threatened with total extinction. I think that this systemic inequality of public markets is what needs to be corrected.

  3. Thanks Sunil, we are working on something more related to market structure issues around public equities which has weird mix of Ferrari and Donkeys. Ferrari is micro second trading. Donkeys are a) T+2/3 Clearing and b) quarterly 10Q reporting c) periodic paper driven compliance and regulatory reporting. Blockchain trustless/immutable has to be part of the answer.

  4. Bernard,

    It is your great age and wisdom that makes you a cynic. Good piece: as a similar old geezer I tend to agree with most of it.

    Cheers. H

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