Crowd Funding and Lotto: Which Is Worse?

01/15/2013 05:00 pm ET | Updated Mar 17, 2013

The Securities and Exchange Commission is finalizing its work on implementation of the Jumpstart Our Business Startups Act, signed into law by President Barack Obama on April 5, 2012. Concerns that common folks will lose money if they invest in crowd funded ventures are one of the main issues.

Let us assume that the proverbial average Joe has a $50 weekly budget for discretionary expenses. He may spend it on a night out, some gadgets he does not need, or lotto, the only high-risk, high-reward investment opportunity available to him. Let's say that Joe is willing to cut his discretionary expenses at half; hence, he will have at his disposal $50 every other week, or about $100 per month. What is wrong with letting Joe invest this money in a business? For many start-ups or small businesses, anywhere between $10,000 and $100,000 is plenty to get going. With the help of the Internet, a business should have no problem finding hundreds or thousands people like Joe willing to risk their $100.

If Joe makes 12 $100 investments per year for a total of $1,200, he will likely lose everything on half of his deals, he might do so-so on a few, and he might have some meaningful gain on one or two. He will be much better off than had he spent that $1,200 on the lottery; he might have more fun, learn something, and reap greater benefits than by spending his money in bars.

If 10 million Americans like Joe (the number is arbitrary; it could be as many as 100 million -- after all, there is that famous 99 percent) invest $100 per month in a business of their choice, that is $12 billion dollars diverted yearly from consumption to investments, to entrepreneurship, and to economic growth -- what is wrong with that? Among these 10 million of $100-per-month investors, at least a few will learn how to do it well, and in a few years, become millionaires themselves. This is a better way for the 99 percent to narrow the gap between them and the remaining 1 percent, than by occupying Wall Street.

Entrepreneurship is the essence of success in a capitalist society. Not everyone has the talent and willpower to learn to play the piano, but most of us like music. Not everyone has the talent and willpower to become a successful entrepreneur but most of us like to be part of our society's success. By investing his $100 in several small start-ups every year, eventually Joe will see a product made by a company he helped some years ago at Walmart; he will see a prosperous small business in his community that he assisted from the start. This pride and sense of belonging to society will be reinforced by dividend checks coming every year. Letting the government limit Joe's ability to invest just because he is poorer than the big Wall Street boys is legalized discrimination based on wealth status.

We have to allow Joe to play the same investing game the big Wall Street boys are playing, but on a level he can afford. However, it is up to Joe, not to the government, to decide what investment he can afford to make. If he makes a wrong decision, he will suffer the same consequences as if spending his money unwisely at a bar, on lotto, or on gadgets. Capitalism is about making risky ventures. If we want Joe to vote for a presidential candidate who opts to keep the U.S. as a capitalistic country, we have to give Joe a way to participate in the system. We feel no compassion for rich people losing money on their investments. Why should poor people not have the same freedom? Putting the government in charge of protecting the average Joe from risk is socialism. The irony is that by limiting the freedom of average Americans to invest in risky ventures, the government of the supposedly most capitalist country in the whole world institutionalizes the message that capitalism is bad, socialism is good. Lenin is cackling in his mausoleum.

Government is about certainty. If making small risky investments would be legal, people would complain that they lose most of the time. In lotto, the risk is clearly defined: People expect to lose most of the time. No one is complaining.

The government wants to protect the public from losses arising from risky investments in crowd funding. I see some inconsistency here, as it is the government itself who runs the lottery, the only low-stake, high-risk, and great-return investment available to the public. One may speculate that if crowd funding will become as popular as lotto is, people will spend less on lotto, and more on risky business ventures. In result, the government will lose meaningful income coming now from the lotto. We can only hope that this does not affect the decision-making process of the government employees now in charge of making crowd funding successful.