Tuesday, November 9, 2010

Crowdsourcing makes a splash on the stock market

A new startup, EquitySplash, has recently announced that it is going to use crowdsourcing to attract stock investors. In a move that makes traditional Wall Street investors shudder, the platform EquitySplash is developing will enable people to deposit money into a collaborative fund and then invest the amount of money they initially deposited into stocks they personally choose.
When the trades close each day, all profits and losses are distributed to each fund member. The benefit is theoretically two-fold. First, the successful trades will benefit all members of the collaboration. Second, the risks and potential losses are spread out over the larger member pool.

Will crowdsourcing work in equity management? Can a crowd of peers through the not yet released EquitySplash pick better stocks than a mutual fund manager? Since EquitySplash is still in beta format, they are not currently doing any open registrations, so it is impossible to measure performance results at this time.

Crowdsourcing stocks certainly appears to be a creative alternative to those who are tired of the traditional approach used by the investment fund industry and the Wall Street political machine, but it might raise several eyebrows with the SEC.

It’s also likely that EquitySplash has done enough research to cover their legal bases, but their crowdsourced model seems to violate investment adviser regulations. The SEC will surely keep a close watch on EquitySplash’s success upon market release to ensure they stay on top of all investment regulatory requirements.

The bigger question lies with investors—ordinary people and whether or not they will entrust their money to be invested via crowdsourcing by people they don’t even know. Critics of this new model would say that most people will stick with the more traditional method of investing.

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