New Crowdinvesting Rules Mean Everyone Can Play VC

http://betabeat.com/2012/06/amateur-hour-new-crowdinvesting-rules-mean-everyone-can-play-venture-capitalist/?show=all

by jc4p • 14 years ago

53 43 14 years ago

durkie3• 14 years ago

How exactly is this bill different from just normal contract law? Is it not already super common for small businesses to solicit money from friends/family in exchange for a share of the new company?

wtvanhest2• 14 years ago

There is a lot of regulation around raising money for businesses of any size. In general if the investors are accredited you can raise the money, if the investors are non-accredited you cannot.

In order for an investor to be accredited, they must make over $200,000/year or have a liquid net worth of over $1m.

http://www.sec.gov/answers/accred.htm

This bill builds in an exception for non-accredited investors to invest in much riskier companies. Before this bill, the only way for non-accredited investors to invest would be if the company went public which is very expensive.

gm3• 14 years ago

So is it illegal to have your acquaintances and family invest in your startup? If not, then have all startups been breaking laws all along?

If not, then what's the difference? The link you mention does not address that issue at all (it just defines what an accredited investor is)

citadrianne3• 14 years ago

It's common, but there actually is no exemption for friends and family. Those offerings should technically be done under the 506 exemption which require investors to be accredited.

It was also illegal, before the JOBS Act, to engage in "general solicitation," which is what raising money via a publicly-viewable crowdfunding page would amount to.

durkie3• 14 years ago

That's what I was wondering -- I've heard of the accredited investor barrier to entry, but it does seem like rule 506 would allow for investment from anyone.

tptacek3• 14 years ago

As I understand it (ie: barely), the problem here isn't that the SEC is going to send agents in black suits and sunglasses to arrest your parents; rather, the problem is that when a real VC's counsel reviews your company's paperwork, they'll throw a fit if there are nonaccredited investors in the company. As I understand it (less than barely), the biggest real-world issue is that nonaccredited investors can cause extremely expensive legal headaches down the road for a company if those investors decide they've been wronged by the company.

steve8918• 14 years ago

If there are initial investors into a startup via crowdsourcing, are there any protections given to these investors against the tricks that veterans would play, like dilution, preferred shares, etc?

It seems pretty easy to me for someone to set up a startup, get initial funding through crowdsourcing, and then as it needs another round of cash infusion, it lets a bigger VC come in and dilute the hell out of the initial investors.

It's actually less of a risk for VCs because they can let retail suckers take on the higher risk during the initial round, and if the startup survives, then they can swoop in and invest in a more promising company, and dilute the initial investors into nothingness.

citadrianne3• 14 years ago

Those kinds of protections will be decided by the SEC, although I don't know if they'd think of that. But now is the time to tell them because it's in a public commenting period: http://www.sec.gov/comments/jobs-title-iii/jobs-title-iii.sh...

itg• 14 years ago

VC's were pushing hard for this bill under the guise of "job growth" and every politician bought into it. There were numerous folks who said it allows for fraud and the bill was pushed without looking at the can of worms it opens. It benefits the VC's while reducing protections for investors.

I wonder how long before we start hearing stories about retail investors getting screwed over by VC's in the media and makes people even more wary putting money into the crowd-sourcing fad.

damoncali5• 14 years ago

I don't think the VC's like the crowd sourcing parts. That does nothing but cause them headaches. They like the other bits that let them stretch the truth about IPOs.

I don't expect crowd sourced deals to get crammed down by VC's - there is too much risk in those deals to deal with a bunch of non-professionals. I expect crowd sourcing to be a red flag that kills your chances of raising professional rounds.

wilschroter• 14 years ago

None of these evolutions in funding happen in a vacuum. There will be new structures to accommodate crowdfunding investors as well as basic provisions.

Remember too that VC's fund an incredibly small number of early stage deals compared to millions of companies that get started each year. Not sure that companies that are heading in the venture funded track are necessarily the model for this.

gersh• 14 years ago

Can you crowdsource all the way to IPO? Do the crowdsourced investors get right of first refusal? Can you do something like: Round 1) 1000 investors put $100 Round 2) 10000 investors put in $1000/each Round 3) 10000 investors put in $10000/each Round 4) IPO

Will VCs become more like activist hedge funds, that invest in public companies. If startup stocks are liquid, will VCs have to deal with mark-to-market valuation of their portfolios?

littlegiantcap3• 14 years ago

I think the author is overlooking one very important thing. Crowdfunding for startups or small business isn't only about the financial return. Yes some people are going to put $100 into a company claiming to be the next facebook thinking they'll be rich. However, many, many more people will invest in these companies to be a part of something or support their friends and families etc. All of the satisfaction isn't derived from the return.

That being said, protecting investors and maximizing their likelihood of return is going to be largely about the platform. What kind of deals do they facilitate? How do they vet? etc.

The next year is going to be very interesting, and I'm excited to see how this pans out, especially because I'm one of those guys working on a crowdfunding platform.

_delirium• 14 years ago

I agree on motivations, but if that really is someone's motivation, can't Kickstarter already handle that? You put in your $100 just to help out and support your friends/family, and in return you get some swag or recognition or future product, but not an equity stake.

cube13• 14 years ago

Kickstarter only allows projects that have a tangible end. They don't allow projects that have non-concrete goals like "make a business" or "hire people".

littlegiantcap3• 14 years ago

The problem with that though is the equity stake is an important piece of the puzzle. It may seem a little paradoxical, but by giving out an equity stake you're reinforcing the non monetary social rewards as much as the monetary ones. Not to say of course that the money isn't important because it is, but my point was there is many kinds of "rewards" an investor receives. Money is just one part of the equation.

rprasad• 14 years ago

Kickstarter is essentially a form of prepayment triage: if enough people want to pay for your product in advance, you get the money to make the product.

Crowdfunding is simply cash for equity. The investor is not getting a product, so the Kickstarter model does not work.

cmcewen2• 14 years ago

If you throw enough spaghetti against the wall, some of it will stick. That doesn't mean you get to eat the spaghetti, nor does it mean the spaghetti on the floor has no cost.

gm3• 14 years ago

wtf am I reading?

I did not get the analogy. If only some spaghetti sticks to the wall, it means you have a messy wall, less spaghetti left to eat, and spaghetti that isn't all cooked yet. Sorry, but I do not get what you're trying to say.

cmcewen2• 14 years ago

Sorry, should have been a bit more clear. Some of the spaghetti being thrown against the wall (companies taking crowdsourced money) will stick (be successful), but the people who threw it (people putting in crowdsourced money) won't necessarily benefit the most, and there could also be damage from the spaghetti on the floor (failed companies). I'll work on my analogies.

dxbydt• 14 years ago

The key phrase is "Play VC". Much like getting an etrade account lets you "Play Daytrader". To do some serious damage you need a little more firepower.

damoncali5• 14 years ago

Do you remember the day trading centers back in the bubble? They managed to do some serious damage.

api• 14 years ago

I have radically mixed feelings. On one hand, I'm all for democratization. On the other hand, this is a little bit like democratizing a fish tank by dumping in a couple of sharks. The average person simply has no concept or mental framework to even imagine the sort of high-powered sociopath one encounters in the business world.

confluence• 14 years ago

Yay! This is a great idea, isn't it everybody?

I mean, unsophisticated investors who barely have the time or inclination to understand how financial markets work (because the have jobs/families) are just about to get the right to invest in the "new new thing".

Now, I'm all for free rights, but that is just insane!

When people get a whiff of possible massive resturns - housing, stock, emerging markets, options, lottery tickets, IPO issues, etc. - they "invest" in them wishfully thinking that they have even the slightest idea as to what they are actually doing (some do - but most don't). These are exactly the wrong type people who should be running extreme risk capital (which is why we have VCs in the first place). These people will get slaughtered.

If average people can barely handle relatively regulated and tested markets like stocks, houses and IPOs - how the hell are they going handle startups which have an insane signal to noise ratio in a rising market where "successful" funding can hide business model "failure".

But hey! There's no bubble right? The IPO market is soft.

But who needs an IPO market when you have massive liquid pools of dark private retail capital.

The lambs are coming in for the slaughter and the wolves are salivating with glee!

If I understand this correctly, this new law may just be akin to the repeal of Glass-Steagall in 1999 (http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act).

Let the games begin!

New Crowdinvesting Rules Mean Everyone Can Play VC

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