The Daniels Fund Ethics Initiative at the University of Colorado Denver Business School recently hosted, Crowdfunding or Crowdfrauding, a panel of distinguished business and academic experts to discuss the ethics of raising investment funding from “the crowd.”

The event was moderated by the Business School’s own Associate Dean of Programs, Dawn Gregg, and featured these panelists:

• Jay Scoggins—U.S. Securities and Exchange Commission
• Gerald Rome—Colorado Division of Securities
• Tim Hatten­­­—Colorado Mesa University
• Karl Dakin—Colorado Capital Congress PBC

Crowdfunding, a relatively new method for business fundraising, is changing to a model seeking to raise investment capital from private, individual investors, often by soliciting these investments over the Internet.  This capital can further the ability of start-up companies to develop new products and launch new business.

The panel explained that in May 2016, the U.S. Securities and Exchange Commission will relax disclosure and regulatory rules for the sale of securities, making it easier for businesses to raise capital through crowdfunding. While the change provides an easier route for startups to raise funds, it could also put investors at risk.

Gerald Rome with the Colorado Division of Securities noted that Colorado recently passed its own crowdfunding legislation, applicable if a Colorado company engages in crowdfunding only with investors residing in Colorado. The intent: to implement safeguards that protect individual investors. He touched on ethical concerns, noting the danger of sophisticated businesses partnering with unsophisticated investors. The new Colorado legislation aims to reduce risk by placing limits on individual investments, as does the federal JOBS Act which provided the framework for interstate crowdfunding.

The panel also discussed integrity, trust, accountability, respect and viability as potential ethical issues in crowdfunding. While almost all companies seek funding with good intentions, the fact is that 95-97% of startups eventually fail. If a company fails, who is held accountable?

The panel agreed startups that follow an ethical path will practice transparency by complying with the law and honestly disclosing potential risks—not just rewards—upfront. Furthermore, as the business evolves, investors deserve regular updates on the organization’s progress. The panelists warned that startups that lack respect for investors by withholding potentially negative information, or failing to disclose when the company faces challenges in growth, will not be viable in the long-term.

The panel concluded that a lack of ethical behavior in crowdfunded businesses sets the stage for the organization’s eventual demise.

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The University of Colorado Denver Business School recently received a grant from the Daniels Fund to participate in the Daniels Fund Ethics Initiative, which is aimed at teaching students principle-based ethics, emphasizing real-world application of ethical principles, and extending ethical behavior beyond campus and into the community.

The Daniels Fund Collegiate Program was launched in 2010 with a $7.5 million grant and eight participating schools, and was renewed for another five years (2015-2019) with an $11.25 million grant and the addition of three more schools, including the CU Denver Business School.