No reputation measures is the critical flaw in the JOBS crowdfunding bill

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The JOBS crowdfunding Act is a great step forward, but the potential of the entire scheme is undermined by the lack of reputation measures.

This is my first opportunity to write about the historic passing on Thursday of the JOBS (Jumpstart Our Business Startups) Act that allows equity crowdfunding in the US.

I have covered the early moves towards equity crowdfunding in the US that resulted in this bill and included a chapter on the topic in Getting Results From Crowds. It is very exciting to see this come to fruition, in the end faster than almost anyone could have predicted.

I believe that this is a critical shift that is taking capitalism into a new phase. The capital markets are – finally – becoming more open, allowing capital to go where it will be best used.

Of course there will be massive challenges along the way – this is just a first step and there will be much experimentation and discovery. There may be backward steps along the path too, but this move by the US government paves the way for legislatures around the world to also try equity crowdfunding in various guises.

It is interesting quite how divisive this bill is proving to be, with the enthusiasts evangelical, and the nay-sayers portenders of dire scenarios.

Sure, some things will go wrong, but it would be a massive mistake not to see how we can make crowdfunding and more democratic flows of capital work, rather than sticking with our current antiquated capital markets.

However there is a fundamental flaw to the JOBS bill in its current form: it does not allow reputation measures.

Rafe Needleman did a nice analysis JOBS Act: 5 things to look forward to (and 5 to dread) in which he notes:

Directories and “portals” of crowdfunding opportunities will be severely limited as to the information they can display to users, since they’ll be forbidden from making recommendations on investments. That means no rankings, no scoring, and no editorial advice. Companies will be able to put their information out to consumer investors, but it will be difficult for investors to rate the companies against each other. Companies like CrowdCheck and EquityNet (story) are building tools for investors that may help counteract this negative.

I have long proposed that the rise of the reputation economy would enable better allocations of resources including capital.

The power of crowds is less about giving money, and more about collectively judging where we should be allocating capital.

Of course reputation measures for companies seeking crowdfunding will be massively gamed. Yet that can be overcome. The choice between having flawed but gradually improving reputation measures and none should clearly be on the side of having measures.

I am less confident in the success of crowdfunding measures that do not allow reputation measures.

I hope that the US government – or perhaps another more insightful government – will allow reputation measures on companies seeking crowdfunding. There will be multiple reputation measures available, and people can choose the one they trust the most (i.e. the best one will win). There is a direct analogue to the ratings agencies such as Moody’s and S&P’s in the public equity markets, however there will be more choice, and probably a better job done.

I look forward to a rich and rapidly developing marketplace for reputation measures on crowdfunded companies.

** See information on our global series of Crowdsourcing Workshops starting with Sydney on April 16 and then Cologne, London, Paris, Brussels, New York, San Francisco and other cities **

This post originally appeared on Getting Results From Crowds