I’ve been thinking about stock markets. No, not “The Stock Market” — just the very idea of a stock market. Why do we have a stock market? What was the major force behind them.
So, I start with OTC:BB — this is an unregulated stock market done by bulletin board. It’s the original “crowdsourcing” model. Here’s how it works.
1. You write a business plan
2. You issues shares
3. You put the shares up on OTC:BB
4. You get money.
Sounds good, right? Except it’s full of scams. There’s two different types of scams on an OTC stock. The first is the business issuing the stock may not be legitimate. A lot of people can write a document that says, “I’ll buy a boat, and you fund me. I’ll give fishing tours. I’ll pay out my expenses, and any profit I have will go back to investors.” In reality, the person means, “Give me cash, I may or may not buy a boat with it. I may or may not sell tours. I may or may just take the money and run.” I don’t know what % of businesses in OTC are real, and what are vapor companies with a good story.
Then, there’s the next scam — the secondary market. It has a name, “pump and dump”. Some joker buys shares in a low-volume, low liquidity company. He then goes to message boards, twitter, social media, blog spam, spam, etc and tells anyone who can read, “Buy XXX!”( the pump ) Some people do buy, and because of poor liquidity, price skyrockets. Joker then sells his stake( the dump ), but again, due to poor liquidity, price crashes. The Joker who does this makes money on the spread — the price he bought prior to pumping, and the price he sold after pumping.
So, these are the two follies that will hit crowd-sourcing. We’ll see great, “Prototypes” with no execution from some sort of LLC. We’ll also see some form of crowdfunding equity, with some form of secondary market, and then, “Pump and Dump”. Both of these actions will harm the market for real innovation.
The sad reality is, the scams probably aren’t even the problem. The underlying businesses are. Odds of any idea becoming a viable business are maybe 1/1000. As an idea gathers heat and light, it moves up from the ether into the professional market. The odds go up by orders of magnitude as the underlying idea performs.
So. the flow path could be:
1. Have idea.
2. Make “prototype”( actually, a good video with good effects would do it ), write pitch.
3. List on an OTC.
4. go to crowdfunding sites and push the “product”. Mention the OTC:BB stock symbol or “crowdsourced investing” integration.
5. Sell product and shares to investors.
6. Deliver ( this is the hard one )
7. Get on a path to a true IPO.
Some % of this will be scams( who knows how many ), 99.9% of these ideas will fail to become going concerns. 1/1000 will make their investors rich.
I can think through income, diversification, secondary market, derivatives, options and chains, etc… that need to happen to make this flow possible. What will happen? We’ll re-invent a stock market. The name will be new, “Crodvesting” instead of “OTC:BB”, “Crowdfunding” instead of “Reserved Sales”. But, all that’s happening now, is that these old concepts are getting new titles, web 2.0 styling, and called, “New”… The are, however, solving the real problem — there’s too much regulation stopping new businesses from attracting equity capital. This regulation stops scams — but it also stops new ideas from breathing. Crowdfunding won’t really help this problem, and we’ll still need a stock market.