We regularly get questions from people wanting to invest in "hot" new companies. Lately all the media buzz about a looming public offering of shares from Facebook has more people than ever wondering how they can get in on the action.
The answer usually is: they can't.
Think about it: people are interested because they expect that an investment in something like Facebook could make them some quick cash, maybe a lot of it, and there's a good chance they could be right. So ask yourself this - would the big Wall Street underwriters who bring such firms to market really let the average investor make some easy money, or would they share the bounty with their favored fat cats? Remember who we're talking about. These are many of the same firms who brought us the financial crisis, took huge bailouts, then paid millions in bonuses to retain their "best" people. They don't exist for the average investor.
That's where "crowd funding" comes in. The theory is that small startups can go to the public - the average investor - and get investment capital to start and grow businesses. NPR's Morning Edition did a story about crowd funding this week. Sounds like a fine idea, but lurking behind it s the ever-present specter of securities fraud. Stock scammers are not new, and a hallmark of their crooked trade is to prey on the unwary, often in modest amounts. It's not hard to imagine a website touting plausible-sounding "up-and-coming" companies and encouraging the unwary to make a small investment. Plenty of people might "invest" $5, $100, $1000 hoping for a long-shot win. After all, people throw away money on lottery tickets every day. Experience suggests that such sites would pop up, collect money, and disappear, leaving investors with nothing and regulators hunting a thin trail.
Crowd funding sounds like a good idea, but without adequate safeguards for the investing public, it won't be a path to Fat Cat status.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).