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Equity crowdfunding is a wolf in sheep's clothing

Buying equity and backing a game you love are different things; conflating them is little more than an attempt to remove protections from small investors

The launch this week of Fig, a new crowdfunding platform aimed specifically at videogames, is the latest attempt to bring to life an idea that has sparked around the industry since before Kickstarter was a glimmer in its creators' eyes; direct investment in game development by game consumers. This would take the crowdfunding model to what some see as its logical conclusion - in which people backing a project receive equity in that project in return, and should the project be a success, they'll share in the profits.

Fig isn't quite there yet; this model is the creators' stated goal, but for now, only professional investors can actually get equity in the projects on the site. Everyone else can put money into the projects, but they'll only be "ordinary" crowdfunders for the time being - able to receive Kickstarter style rewards, but not in line to receive equity or any share of a project's profits. It will be interesting to see how this impacts on consumers' willingness to back projects; it's one thing to pitch in with a lot of other consumers to get something amazing funded on Kickstarter, but psychologically quite a different thing to do so while being constantly aware that "professional investors" are also going to be making money from any success down the line, while you'll get a game and a few bits of tat, at best.

That sense of unfairness - that professional investors can make money from their backing, while consumers just get a product and a pat on the head - is what propels support for this kind of equity crowdfunding. It may even propel that support all the way through to the structural and legislative changes required to actually permit that sort of model; at present, Fig and its ilk can only aim at such a model because the regulations and restrictions around investment are fairly significant, and certainly far too weighty to permit equity in projects and companies to be sold based on a crowdfunding project video. That regulatory burden infuriates the extremely pro-market types who hanker for this kind of funding model; to them, it's precisely the sort of heavy-handed regulation that stifles innovation and slows down progress.

"People putting money behind equity crowdfunding projects ought to be extremely well-informed about the project, about the market and about the risks and returns involved - just as you'd expect to be about any investment"

That's a stance that's hard to argue with - not because there aren't strong and important points to be made against it (starting with its economic illiteracy, as it is based on a view of market economics which is heavily oversimplified), but because it's a strong ideology that attracts particularly strident supporters. Yet as services like Fig launch and the merits of equity crowdfunding find themselves being debated in ways that slowly inch this model towards reality, those arguments against the model demand to be aired and confronted.

Let's start from the basic question of what, exactly, crowdfunding is supposed to accomplish. From the developer's perspective, it's designed to allow you to access funding from a large audience of people who each chip in a small amount of money in order to get your game made - as distinct from the current model, where you try to fund your game with a single large tranche of money from a single investor, be that a venture capitalist or a publisher. In a purely mechanical sense, you don't really care what the motivation of the people handing over their money may be.

From the consumer side, motivation is everything. Up until now, the sole consumer motivation in crowdfunding has been love for the product being proposed and trust in the creator's ability to make something great. In the worst case scenario, a consumer who backs a crowdfunding venture sees it as a pre-order for an as-yet non-existent product; even at that, their backing indicates a love of the game or product, while in the best-case scenario, the consumer understands the risk involved in their backing but chooses to donate money on the basis that they love the work or its creator and want to support it as best they can. Either way, the motivation is entirely based upon the consumer's personal tastes; "I love this kind of thing, so I'm willing to put some money towards its creation".

Equity crowdfunding may look the same on the surface, but the motivations at play could not be more different. Now consumers aren't being asked for their money to back something they love; they're being asked to guess (and we'll discuss just how educated and informed those guesses may be in a moment) whether a game will be successful or not, and place investments accordingly. The question is no longer "do I love this thing?", it's "do I think this thing can be a commercial success?" - and those are utterly different sentiments. If anything, the whole instinct that drives people to throw money at a Shenmue sequel or a revival of the point-and-click adventure genre is the understanding that these genres are not commercially viable and successful; the underlying force behind crowdfunding has been the desire of people with niche interests to see those interests served in spite of commercial realities.

Equity turns that idea on its head in a most unpleasant fashion, demanding that they see their money not as support but as an investment, and calculate the risks accordingly. You may love point-and-click adventures, or Shenmue, or Igavania games, but you'd never actually invest money in them in the hope of return; that's rather the point of their Kickstarter campaigns. You'd invest that money in commercially viable things, things with mainstream followings, things far outside the niches that you love.

Suddenly we're not talking about crowdfunding any more; we're talking about investment, plain and simple. This isn't a matter of silly heavy-handed regulation preventing passionate fans from putting money behind the projects they love; existing crowdfunding models are about supporting projects you love, while equity crowdfunding is a much more calculated and dispassionate thing. People putting money behind equity crowdfunding projects ought to be extremely well-informed about the project, about the market and about the risks and returns involved - just as you'd expect to be about any investment.

Indeed, most of the "heavy-handed" rules and regulations which equity crowdfunding entrepreneurs would like to circumvent are related to ensuring that investors have as much information and insight as possible, to ensure that they're taking risks with their money with open eyes. If what equity crowdfunding is about is actually removing those protections and allowing people to become "investors" without access to all the information to which they would otherwise be entitled, how is it anything other than a scam, or a scam in the making?

This is the catch-22 at the heart of equity crowdfunding, the knot I simply cannot untangle in the supposed logic surrounding this model. For an investment scheme to be ethical (and at present, legal), it must provide investors with thorough information and must be targeted at investors who are well-informed and have a reasonable chance of making good decisions. The fulfilment of those conditions is the reason why every kind of risky investment and financial advice is so strictly regulated and controlled, because the alternative is nothing less than an open playing field for con artists and shysters of every variety. In terms of backing a videogame with investment capital, the people who are most informed and most capable of monitoring and overseeing their investment are precisely the people who already do this for a living; the professional investors, venture capitalists and publishers, who assess the commercial potential of a game before making a decision about whether or not to back it.

"Equity crowdfunding...doesn't tap into the same emotions and enthusiasms as crowdfunding; it's got nothing to do with reviving niches and supporting creators"

Consumers masquerading as investors do not have access to the market data, the insight or the experience of those professionals; nor do they have the clout and the skill to oversee the progress of their investment. Essentially, then, equity crowdfunding proposes that people without the skill or knowledge to make good commercial decisions should be given less information and data than professional investors and subsequently given less control and insight into their investment than professional investors... All in return for, what, precisely? The feel-good buzz of having backed a game you like? Yet if this is an investment opportunity, then it's not meant to be about a game you like, it's meant to be about a game with good commercial prospects; and if the commercial prospects were that good, professional investors would already have backed it. Catch-22.

I don't think that the people behind services like Fig are quite as cynical as this assessment would suggest; I don't think they have actually sat down with the intention of designing an investment model which does nothing but reduce the oversight and increase the risks being piled upon the most vulnerable class of investor, even if that's what they're actually proposing to accomplish at the end of the day. Rather, I think they are informed by an ill-conceived half-grasp of some market concepts, a heady mixture of Silicon Valley's recent obsession with innovating in deregulation (and to hell with who gets hurt) rather than in technology and some vague market fundamentalist gobbledegook about invisible hands and the wisdom of crowds. All of this forgets, rather conveniently, that proper market theory actually demands access to information and the ability to make educated choices; precisely the things protected by the regulations which would have to be relaxed for equity crowdfunding to take off.

I think crowdfunding has been an incredibly positive thing for videogames; it has changed the landscape of the possible in a remarkably short space of time, has turned around the careers of wonderful creators and resurrected genres once thought dead. It has harnessed the love and enthusiasm of gamers and turned the theory that a niche can still be commercially viable with only a handful of truly dedicated fans into a consistently viable business model. Equity crowdfunding, however, is a wolf in sheep's clothing; it presents itself as the logical continuation of the crowdfunding model, but is nothing of the sort. It doesn't tap into the same emotions and enthusiasms as crowdfunding; it's got nothing to do with reviving niches and supporting creators. Whatever the actual intentions of its proponents - to whom I give the full benefit of the doubt - the model being put forward is little more than an underhanded way to snatch protections from vulnerable would-be investors, dowdily swaddled in the glad rags of "passion" and "love" which it has shamelessly borrowed from Kickstarter and IndieGoGo. I am always happy to see games find new audiences and creatively fund themselves; but equity crowdfunding should not be one of those ways, and I sincerely hope that the regulatory changes required to permit it are never passed.

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Rob Fahey avatar
Rob Fahey: Rob Fahey is a former editor of who spent several years living in Japan and probably still has a mint condition Dreamcast Samba de Amigo set.