FORTUNE — Steve Rattner has angered a crowd.
The remarks frustrated a number of individuals currently working with the Securities and Exchange Commission to make equity crowdfunding a reality for regular investors. Ryan Feit, founder and CEO of the crowdfunding site SeedInvest and a former investment banking analyst at Lehman Brothers, called the column “comical,” suggesting that “Mr. Rattner should probably check his math” in regards to his lottery assessment. (Winning the MEGA Millions lottery, for example, which features games from 44 participating lotteries, has odds of 175 million to 1.)
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Math aside, Rattner’s opinion certainly merits attention considering his role as lead negotiator in President Obama’s bid to restructure the auto industry back in 2009. He also boasts a long career in investment banking, including experience with firms like Lehman Brothers, Morgan Stanley (MS) and the Quadrangle Group, a private equity firm he co-founded in 2000. In his column, Rattner vehemently discounts the law’s ability to create new jobs: “The largest number of jobs likely to be created by the JOBS Act will be for lawyers needed to clean up the mess that it will create.” Feit says this notion is incorrect, citing Kauffman Foundation reports that found nearly all net job creation stems from startups, including 2007 when startups were responsible for roughly two-thirds of new jobs.
In a phone call with Fortune, Rattner acknowledged that the law could create jobs but not the kind that will stick around long-term as startups fail more often than they succeed. “In fact, I would almost argue that there would be negative job creation,” he added. “Let’s assume [someone] puts $2,000 into some mutual fund or some good stock that is a good, solid, real company. That money will get used better than it will get used by some flakey entrepreneur.”
The underlying implication of Rattner’s column is that crowdfunding will face major fraud issues. The concern — not just from Rattner — is that investors will be taken advantage of by dishonest businesses seeking funding with regulatory oversight purposely weakened. (The balancing act, of course, is that the law wants to make it easier for entrepreneurs to attract investors; the original SEC regulations were intended to protect investors by adding certain obstacles to fundraising.) Danae Ringelmann, co-founder of the crowdfunding platform Indiegogo, believes Rattner is off-base to imply fraud will be a major issue. She claims that Indiegogo has not had any issues with fraud since its founding in 2007. “He misses the fact that crowdfunding has existed for the last five years, and folks have been keeping their sites clean,” she says.
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Numerous crowdfunding platforms have worked with the SEC in an effort to assist in the crowdfunding rule writing process, for which the SEC is responsible. SeedInvest has been joined by major platforms like Indiegogo and RocketHub, who meet regularly to answer questions and submit suggestions to SEC members. Jason Best, founder of Crowdfund Capital Advisors, an advisory and consulting firm that helped write the crowdfunding language in the JOBS Act, simply wants to open a dialogue with crowdfunding naysayers, including Rattner. “We’ve seen this before,” he added, “where we’ve had very smart, very talented people have a knee-jerk reaction to this because they’re applying old mental models to a new system.”
Today, only investors who meet certain wealth and income requirements are allowed to invest in startups in exchange for an ownership share. The new law would allow essentially anyone over the age of 18 to invest a portion of their income to startups that will campaign for investor money using crowdfunding websites.
Update: In an email to Fortune on Tuesday, Rattner addressed two aspects of the story above, including his comments comparing equity crowdfunding to playing the lottery. “I never said the odds were worse than winning the jackpot in the lottery … just worse than winning something in the lottery,” he writes. Rattner also clarified that his biggest concern with equity crowdfunding is not fraud, but rather “stupid business ideas.” In a phone call with Fortune yesterday, Rattner said that he believes there are far better ways to invest money — like in the mutual funds or proven corporate stocks — than to invest in unproven entrepreneurs through crowdfunding.
