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Now the Really Hard Work Begins

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With the ink still drying on the just signed JOBS Act, we are witnessing a new phase in America's economy that will democratize access to capital and change the landscape for investors.

This new period will look like "the wild, wild West" now that the law is unleashing the power of the Internet to allow citizens to invest in startup businesses. That's what's known as crowdfunding, something previously limited to non-profit groups or businesses promising non-monetary returns.

The technology community is positively giddy about this development, which will expand the pool of investors dramatically and reduce entrepreneurs' dependence on established financial institutions for access to capital. Now, the really hard work begins as the Securities and Exchange Commission begins writing the rules governing crowdfunding.

Just as websites that will facilitate crowdfunding (known as "portals") build out their physical infrastructure to be prepared for when the rules are adopted, we must also work on building a moral infrastructure too. Yes, moral.

That's because this is an entirely new form of capital market, and the tech community and excited entrepreneurs should acknowledge that while we all have new opportunities, there are new responsibilities too. Everyone who worked hard to bring this revolution to life will now have to work even harder to make sure it is not rife with fraud. If that were to happen, it will die an early death.

For crowdfunding to succeed, entrepreneurs, investors, and regulators will all have to cooperate. But the SEC has the hardest job of all the players (full disclosure, I worked at the SEC for four years). The SEC rightly has serious reservations about companies at the most risky stage of development pitching securities to the most vulnerable investors on the basis of minimal disclosure that no one has vetted.

And if things go terribly wrong, who will be blamed? The SEC. So the crowdfunding industry has an obligation to work with the SEC to ensure that investors understand just what they are getting into. We also need to make a special effort to work with groups like AARP and faith organizations to protect older Americans and those who are most vulnerable to fraud and affinity scams. In return, the SEC should be amenable to Congressional wishes that it adopt crowdfunding rules in a timely manner and not impose additional costs and burdens on crowdfunding intermediaries. In particular, the SEC's registration process for portals should be timed so that registration could coincide with final adoption of the crowdfunding rules 270 days from the time President Obama signed the legislation into law.

The responsibility lies not just with the SEC, however. Funding portals will need some form of due diligence to weed out bad actors whose only business is ripping off investors. The company I founded, CrowdCheck, will employ securities attorneys to perform due diligence on startups to make sure they are who they say they are and help entrepreneurs navigate disclosures and filings. We will be part of the crowdfunding community that seeks to keep a level playing field for both investors and start-ups, and we hope other crowdfunding portals will take that responsibility seriously as well.

Start-ups must feel responsible to their investors and to the community that has fought for crowdfunding because we believe it can work. Entrepreneurs need to transparently define what they are offering, and be very clear on those terms and how they will handle relationships with their "crowdholders."

And venture capitalists need to help the crowdfunding industry work out how best to help companies graduate from crowdfunding to venture capital funding. Since the Internet has already democratized media, shopping, and social networking, it was only a matter of time before it disrupted our old model of financial investing. My hope is that angel investors and venture capitalists will be creative and embrace this new marketplace as well.

Most of all, citizen investors need to take a lesson from the playbook of professional investors and treat it seriously. Investors have a moral obligation to actually think before they invest. They can't act as if they are buying lottery tickets. Get informed, watch out for fraud, and fund those who most deserve a shot at the American dream.

Crowdfunding does embody some of the most important aspects of what makes America American: entrepreneurialism, passion, risk, and a desire to give everyone a chance to show what they can do, no matter what their background. But it only works if we apply other American virtues: hard-headed realism and intelligent investing.

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