Originally published at Entrepreneur.com on April 8, 2014
When I penned my tongue-in-cheek-titled article “Will Equity Crowdfunding Laws Be the Death of Kickstarter?” I addressed a misconception that equity crowdfunding under the JOBS Act would have a negative effect on rewards-based crowdfunding sites such as Kickstarter, because the JOBS Act has nothing to do with rewards-based crowdfunding.
Despite this, a recent New York Times editorial and a Bloomberg column, “Attention Suckers: Please Send Us Your Money,” show that even the media fail to grasp the huge difference between rewards-based and equity crowdfunding. Both articles offered harsh criticism for crowdfunding as a whole and for Oculus, a company that utilized rewards-based crowdfunding to raise capital for a virtual-reality system it was building. When Oculus was recently acquired by Facebook for $2 billion, the Bloomberg article accused Oculus of pulling off a “scam” because the supporters of its Kickstarter campaign did not get a share of the profits from the Facebook buyout.
The crowdfunding industry is relatively new, so it’s understandable that members of the general public don’t recognize the distinction between rewards-based and equity crowdfunding. But the public relies on the media for awareness and education, so it is less understandable when large publications can’t be bothered with researching the facts in a rush to throw fuel on the fire of misguided outrage.
A bit of relevant background: Oculus used Kickstarter, the largest rewards-based crowdfunding site, to fund the Oculus Rift virtual-reality headset for video games. Oculus raised $2,437,429 from 9,522 backers. Each of these backers knew that they were not buying stock in Oculus when they donated, and each received something of value in return for their donation. For example, more than 5,000 people donated $300 each to get a developer kit that could be used to create software for the headset. Some of these backers saw future profit potential from having early access to the developer kit, and others likely just wanted to be the first to enjoy the new technology. Even if Oculus had wanted to sell stock at the time rather than giving away tangible rewards, they were not legally allowed to do so, because equity crowdfunding under the JOBS Act is not yet legal.
Eighteen months later, Facebook bought Oculus for $2 billion and the Twittersphere exploded with people upset that they donated $35 to Oculus for a t-shirt that did not magically turn into a financial windfall they never expected in the first place. When I go to McDonald's, I don’t look at the bottom of the bag beneath the spilled french fries hoping to find a stock certificate for MCD preferred shares I can trade on the New York Stock Exchange. Yet, some people were outraged that Oculus did not convert their $15 Kickstarter pledge for a cool poster into Facebook shares or cash.
The New York Times editorial board chimed in with their take on the Oculus deal with “How to Harm Investors,” referring to the SEC’s proposed equity crowdfunding rules as “a joke.” The Grey Lady said that under the JOBS Act, “investors could end up with next to nothing even if they invested in the next big thing.” The Times failed to emphasize that the donors to the Oculus crowdfunding campaign were not “investors” and that the SEC rules only apply to equity crowdfunding, not the rewards-based crowdfunding Oculus undertook on Kickstarter.
The Bloomberg article by Barry Ritholtz was worse. Apparently Ritholtz, whose bio includes being a lawyer, has never read the JOBS Act and has no idea that Kickstarter could not have legally offered equity crowdfunding. But this did not stop Ritholz from writing for the otherwise respectable publication that the Oculus deal showed the JOBS Act “has been revealed as the massive bait-and-switch it is.” Ritholtz further misstated that “regardless of strenuous objections, the JOBS Act became law, making it all-too-easy for companies to raise money.” He topped off his trio of inaccuracies by adding “perhaps there will be some embarrassing litigation from those people who feel duped.”
When The New York Times and Bloomberg do not understand the difference between rewards-based and equity crowdfunding, the crowdfunding industry has a problem. Equity crowdfunding under the JOBS Act, when it becomes legal, could be a game-changer for startup businesses who have no other way of raising capital in today’s economic environment. But when huge media conglomerates scare the public into thinking equity crowdfunding is a scam, even though it does not even exist yet, the chances diminish of entrepreneurs being able to utilize this valuable tool to grow businesses and create jobs. It’s a shame the media did not do their homework before putting out misleading headlines and factual inaccuracies about the good fortune enjoyed by Oculus after using rewards-based crowdfunding exactly as it was intended to be used.