Federal Regulation Could Doom Kickstarter ... and Creativity in Business

If you are somebody who follows the development of Web 2.0 pretty ardently, you must know about crowdfunding and more specifically, Kickstarter. (If not, I would suggest you go to the Kickstarter website and look around. It can be a mesmerizing experience.) What people who have followed the wave of crowdfunding opportunities know is that Kickstarter facilitates a direct contact between potential customers and producers. The reason this matters is because, at present, consumers and creators interface through many other mechanisms in which people like editors, publishers, publicity managers, and economic powerhouses that finance the process of creation become very important. But new regulations imposed by the Securities and Exchange Commission may undermine the power of crowdfunding by misunderstanding how it truly works.

While crowdfunding mechanisms like Kickstarter effectively manage to deliver a well-packaged finished product, they don’t necessarily deliver consistently high quality anymore. Reasons for this are simple to understand. Economic forces that fund creative activities want to maximize their profit, and generally trend towards the safest bets. However, creativity in itself is a very hit-and-miss process, and betting safe tends to throw up repetitive formula-based creations. Also, in the present system, a major proportion of the wealth generated seems to get directed to non-creators like the ones above and not the artists themselves.

Crowdfunding has two intended aims. The first is to direct creativity in the direction consumers and end-users would like to see it go by making creators and consumers interact directly, made possible by the internet. The second aim is to enable creators to have access to funding and investment sources other than the conventional resources controlled by a few. And in an innovative atmosphere like this comes the call for regulation.

Regulation is often necessary where investments are concerned. Regulations provide a safe environment in which people are assured that their trust in those investments would not be betrayed. The factors involved in this are discussed at length in this New York Times article. But regulation by definition would require an established framework of investment upon which it would serve to impose a set of rules. Crowdfunding being a product of the fast evolving system that is the internet, as of yet, it is impossible to pinpoint a stable framework that would work.

The most likely decision in that situation is to make crowdfunding as similar to present public funding systems as possible, like the suggestion of a broker as a mediator suggested by the SEC. But this would defeat the entire purpose of crowdfunding, and establish it as just a stock market or an angel investment instrument on the internet, whereas the true aim of crowdfunding is to create something completely different.

Another problem is that regulation by federal agencies may not bode well for the survival of crowdfunding itself, especially given the utter inability of politicians and established businesses to get a handle on understanding on how the internet works. As we saw with SOPA, the entertainment industry is clueless when it comes to handling new content delivery systems. There is no reason why crowdfunding, a concept much more involved than entertainment delivery, can be grasped by the folks at Washington enough to have any kind of meaningful regulation.

While imposing a few safeguards regarding handling of investments over the internet would indeed be welcome, a full set of regulations by SEC would only succeed in choking any dynamism out of crowdfunding and ultimately end up harming the economy.