Editor’s Note: This Crowdsourcing.org exclusive article comes to us from Michael A. Dinan, president and CEO of Phoenix-based Dinan & Company. Dinan recently launched a crowdfunding portal called ConfidentCrowd, which pairs broker-dealers with crowdfunders.

Crowdfunding could become one of the most promising new strategies for business creation in decades — but intermediaries, investors, and entrepreneurs need to manage the risks to reap the rewards.

When we look back a decade from now, the Jumpstart Our Business Startups (JOBS) Act may rank as one of the most influential changes to U.S. securities law since the 1930s. With its much-heralded provision for crowdfunding, supported by a bipartisan Congress and signed on April 5 by President Obama, this new law stands to revolutionize the way startups and smaller companies raise funds.

In simple terms, this new era of crowdfunding sits at the intersection of Wall Street and social media. Nonprofits, philanthropic organizations, and even indie rock bands have been able to use Internet-based crowdfunding for their solicitation efforts, gathering many small donations in order to facilitate larger projects. The new law is expected to open the floodgates to include equity investments in a full range of high-growth companies.

The rules and regulations aren't yet solidified yet, however. The Securities and Exchange Commission (SEC) has until January 2013 to define exactly how companies will be able to raise up to $1 million in capital per year from investors in chunks of $10,000 or less. The SEC.gov website is currently soliciting public opinions to help chart the course.

Exciting? Absolutely. The anticipated advantages start with the concept that capital for entrepreneurs, startups and early-stage companies will be easier to come by. The talk from politicians — on both sides of the aisle — is that crowdfunding will inject sorely needed stimulation and job growth into today's stagnant economic environment. The expectation from small businesses is that they'll be able to tap into “the wisdom of the crowd” to fuel their corporate aspirations. And, of course, investors are hoping to latch on early to the next Google or Facebook, turning meager investments into an early retirement or a Ferrari in the driveway.

Scary? Perhaps. The common objection to crowdfunding is usually the looming threat of fraud — and certainly, there's no way of completely preventing it, regardless of what the SEC develops as protective measures. The initial fine print indicates that so-called crowdfunding portals will be the required, SEC-approved structure under which such investments will be made, tracked, and regulated.

When all is said and done, however, the losses due to fraud will likely pale in comparison to those resulting from poorly conceived and executed startup ventures. Call it "the elephant in the crowdfunding room."

An Elephant To Never Forget

While industry experts are acutely aware that the failure rates for startups and early-stage ventures are quite high, this fact is seldom discussed as a disadvantage in crowdfund investing. Indeed, some estimates cite failure rates as high as 90 percent; a recent Harvard Business Review case study pegged the failure rates of venture capital firms — many of the country's best, brightest and most visionary startup investors — in excess of 50%.

You probably remember the old business adage: "How do you eat an elephant? One bite at a time." Well, the mitigation of those alarming rates most definitely requires a one-step-at-a-time methodology — starting with the use of qualified intermediaries to screen, evaluate, and structure these challenging-yet-promising investments. FINRA-member broker-dealers best meet these qualifications.

FINRA broker-dealers are trained, qualified, regulated, and audited by the largest independent regulator of securities firms doing business in the United States. FINRA’s chief mission is to protect investors by maintaining the fairness of the U.S. capital markets. As a result, working with FINRA-member firms could be expected to bring the highest level of expertise and confidence to crowdfund investing.

There are a number of reasons that FINRA broker-dealers are the best qualified to bring sanity and savvy to what could potentially be a circus of crowdfunding in the early years:

• They're experienced in evaluating business concepts and entities.
• They have a background in raising capital via private placements on larger, more complex deals, and will be able to downscale and adapt those principles to suit the new market.
• No one has greater due diligence acumen than FINRA firms, both on the people as well as the businesses themselves.
• Their financial analysts are already in place to properly value companies within given industries and markets.
• They have the expertise to structure investments that are fair to both the issuer and the investor. This is particularly key, since an improperly structured seed-capital investment can hinder the ability to raise follow-on investment capital.

There's no question that crowdfunding represents an exciting opportunity at a number of different levels for the business and investing communities. And no doubt, the learning curve will need to be sharp when the first crowdfunding deals start to emerge in early 2013.

While the big concerns revolve around the potential for fraud, thanks to an influx of less-sophisticated investors and small businesses alike, that's only part of the story — and maybe only a small part of it. Simply put, extraordinarily high failure rates could dictate a quick end to all the hopes, dreams, and aspirations of internet-based fundraising. On the other hand, those who are most qualified and experienced at taming and training large wild beasts — FINRA-member broker-dealers — could turn crowdfunding into the greatest, most exciting small business show on earth.

Editor’s Note: Agree with Diman? Disagree? Voice your opinion in the comments section below.