How’s that for a title for a senior thesis at a liberal arts college? Point is, though, that there is no crowd in crowdfunding. There’s not one crowd but many crowds, and whether securities crowdfunding is going to work as expected depends which crowd shows up on any given day.
Advocates of securities crowdfunding long argued that the wisdom of the crowd would expose and prevent fraud. We don’t think that always works; the most notorious exposures of fraud in donation/rewards campaigns so far have been effected by journalists, not the crowd, and as we’ve pointed out for a long time, misleading statements or false promises are also “fraud” and we are seeing the first fraud cases being brought by state enforcement agencies.
So what can we learn from crowd behavior so far, in the donation/rewards space and in online offerings for accredited investors? As an observer in the space has pointed out, the behavioral attributes of the particular crowd can lead some crowds to be "mad" and others to be "wise". It’s also possible to identify some distinct types of crowd from the comments on existing platforms, some prone to madness and others to wisdom:
- The expert crowd. Where platforms focus on one particular industry vertical, it seems you get more informed analysis and input. Look at the questions posed on CircleUp and keep your eye on specialized platforms like Heathfundr and Poliwogg, who are targeting informed health professionals. In some cases, these hyper-informed crowds might be so wise that a regular person might not be able to follow what they are talking about. Need I say that if you don’t know what a company does you probably shouldn’t be investing in it, however many eggheads praise it online?
- The mob. Sometimes the crowd starts to turn on the issuer. This happened with the LUCI project. At first the commentary was positive and then doubts started to build and the crowd piled on, alleging fraud. Was there fraud? Once the mob piled on it was difficult to tell.
- The cult. This is the opposite of the mob. I have seen some campaigns where the science is patently false. Look at the comments on this one, where no-one calls out the science but all the commenters bless the project creators for, in effect, creating a perpetual motion machine. Wisdom of the crowd? Not so much here.
- The MMORPG chat room. One very successful game project, Camelot Unchained, got 145,000 comments on Kickstarter. The crowd here was basically using the comment function as a way to interact with each other as well as the project creator. They were making dates to play the game, and (for all I know) for actual dates too. Good luck extracting any meaningful information from that crowd commentary.
- The absent crowd. Sometimes a project is so patently fake that people don’t bother to make any comments; they just steer clear. If there are no comments at all, that could be a message, although some perfectly legit projects fail to get traction.
Getting useful information from some of these crowds is as likely as getting informed political commentary in online comments sections. The challenge for both investment platforms and investors is going to be imposing some sort of filter on the content.