US Equity crowdfunding is finally here: Steps to getting funded | Hacker News Reader

US Equity crowdfunding is finally here: Steps to getting funded

venturebeat.com

83 pointswalterbell30 comments

Hopefully there is stricter regulation in the US in regard to restricting valuation abuses. Unfortunately in the UK a number of my friends have invested non-trivial amounts into crowdfunded equity.

When I looked into them in detail, it was clear that not only were the valuations completely out of whack but that the T&Cs were equally ridiculous. Most of them will either lose all their money or be stuck with equity that they paid far too much for and more importantly, can't sell.

Be very, very careful and take the time to read and understand all of the provided legal documents. If it is anything like the UK offerings, it would be wise to stay away.

edit: Just for example, many UK crowd-funding offerings will have had investment from VCs etc the week/month before at 1x, the price being put forward to the public 5x-15x.

A few people are wondering about regulations and oversight. Here's a brief summary for this law:

* Max $1 million total fund-raising

* Max $2,000 or 5% net-worth from each unaccredited (i.e. non-rich) investor

* Must file audited financials with the SEC to start, and every year afterwards

* Must use a registered portal, which must be a different entity with different owners

Getting your financials publicly audited every year is a major pain, and I think it's going to make this non-viable for most companies.

No requirement for audited financials, only reviewed financials by a CPA. Which makes this stuff all the more risky.

Apparently it depends on if you're raising over 500K [1]:

"A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor;"

[1] https://www.sec.gov/news/pressrelease/2015-249.html

I don't mean to be rude, but if you read the quote you posted, it directly contradicts your point. Specifically "permitted to provide reviewed rather than audited financial statements." Of course if a company already has audited statements, they have to submit these more rigorous audited statements.

Any day better than what you get on Kickstarter. It's a start and a full-audit costs 25-50k which would literary defeat the purpose of this.

> registered portal

Ugh. More gatekeepers. I don't know why they can't just require documentation and let people do this on their own.

Regardless, if anyone is interested, I believe this is a (partial?) list of such portals: http://crowdedmarket.com/platform-reviews/list-of-investment...

There seems to be serious moral hazard for equity crowdsourcing. Realistically, potential investors don't have to ability to conduct adequate due diligence. The projects seeking funding are likely to be riskier/lower quality since high quality projects will probably pursue traditional VC/angel financing (less hassles, reporting requirements). In the end, you have uninformed investors betting on high risk projects where the entrepreneurs lack any real supervision from said investors.

As opposed to all the shady penny stocks floating around out there?

Here are two companies that have been playing ignorant stock market investors for years:

https://www.google.com/finance?q=NASDAQ%3AORMP&ei=D6w5V5HNKo...

https://www.google.com/finance?q=NASDAQ%3AANGI&ei=Faw5V-iPJ5...

There are literally thousands of fake or terrible biotech and tech companies in the supposedly highly regulated public markets. Base yourself in Israel or China and list on the NASDAQ. Pay someone to publish a bullish article on your blog, wait for buyers, and then dilute. You can have a field day and nobody will bother you.

My point is that investors cannot and should not be protected. Educated? Yes please.

You're definitely right that there are many shady penny stocks being traded OTC.

But I fail to see how shady penny stocks justify an even more opaque and less regulated equity market. Regulation is certainly imperfect, but it's much preferable to anarchy.

In what sense is Angie's List either a penny stock or a scam? How are investors being duped?

I'm just curious because I've seen a few ads for Angie's List and they have a $500m market cap.

The new management team could be better than the old, but the former CEO set up some favorable leases between ANGI and an office building which he and some board members owned.

There were a few other egregious things, but this was the worst. I guess I wouldn't call ANGI an outright scam, but it's certainly shady.

Ahh, thanks. So it sounds like it's probably not in the same class as the pump-and-dump "XYZ Corp is about to blow huge!" penny stock shams that are out there.

Their estimate of the portal fees of 7-12% is wildly wrong. WeFunder[1], a YC company, is charging 3% and there are several others at 5%. [1] www.wefunder.com

What is to prevent someone from gathering some money to create a business that will only provide a revenue stream. Let's say I have no intention of going public, or selling the company.... just raise some money & then run the company.

Can an equity fundraise be offered with a plan to distribute the correct % of earnings to investors?

I don't think this is exclusively an issue with crowdfunding. For example, this issue exists in the public markets. Both Amazon and Google have never declared nor paid dividends.

As an equity holder in these scenarios, you do own a share of the underlying assets, but are unlikely to see any distributed cash flows.

The important distinction being, I can sell my shares of Amazon or Google almost instantly on the open market. The same cannot be said for a company that chooses to remain private.

As far as I can tell, nothing. You're basically just saying a crowd-funded mutual fund would be possible, which seems correct provided the company filed the proper paperwork for it. I'm not sure why investors would go with something like this over just putting money into Vanguard, though.

Religious, racial, or cultural affinity? The impression of exclusivity by putting a ceiling on the number of investors and raising it in increments? The whiff of possible insider knowledge based on bluster and one or two Amazon bestsellers, some press releases, a TED talk, an appearance on Shark Tank, or instagram pictures partying with captains of industry and celebrities? A magical belief system? Why do people put money into anything but Vanguard now?

Yea, I wondered the same thing when I want to a crowdfunding workshop a year back. I asked how do you get your money out if the business never sells. Are the companies required to pay dividends? The people running the workshop kept saying it is the same as buying stock in Amazon and Apple. And I was thinking you really are telling me that buying stock in Bob's Tire Shop is the same as buying stock in Apple. GTFO

As a founder the biggest turn off for me is the fact that you cannot take on more than 500 non accredited investors. As soon you exceed that number and rake up $25M in assets you will be forced to go public, which is absolutely bonkers.

Now to me equity crowdfunding is inherently powerful that you can make investments as little as $100. This dramatically lowers the risk, and makes it a small gamble for small time investors. But as an entrepreneur with a max of 500 investors you end up with a mere $50k, which almost defeats the effort for most startups.

This sounds like a terrible idea. From the founders' standpoint, you are presumably getting nothing other than cash. Doesn't the best investment money also come with expertise and guidance?

From the investors' standpoint, these are going to be the absolute riskiest plays on the planet, yet professionally produced kickstarter videos will make them think product is just about to roll off the production line once they have enough money.

I imagine you wouldn't use it as your sole source of funding, but in conjunction with a more traditional source.

It depends on the business. For a consumer oriented business, it could be great to have a whole bunch of people with a vested interest in your success.

You are discounting the power of small investors. There is a good chance that your unaccredited investors altogether will cast a larger network than your VCs. Also if done right they could become super fans and the best possible promoters of your product. They definitely bring something to the table, but it will be somewhat different than what you'd expect from a YC.

This is seed stage, seed stage investors, even VCs, are making a lot of bets and generally don't have time to work with the company to add much value. Actually our biggest value add investors are also also our smallest.

My company is participating in the new regulation crowdfund rules via WeFunder. It's been a more rigorous process than I expected. To raise over $100,000 we needed reviewed financial information. For an absolutely new company this would be easy (and a reason to note higher risk for an investor) but we have been operating for two years, making it a bit more rigorous.

Shouldn't they impose a limit in the amount of capital that can be crowdfunded? This sounds like it can lead to wild abuses, at least until people learn from their mistakes.

There are limits. Under the SEC's new rules it appears that you can only raise $1 million per year and $100,000 per investor per year through crowdfunding.

Here's a better write-up of the regulations: https://www.sec.gov/news/pressrelease/2015-249.html

Sometimes I wish HN let you post images, because this story is what the "seems legit" meme was invented for :p

At any rate, I'm actually not too worried about a speculative mania developing right now. The type of people to be taken in by this are too broke at the moment. The only way this could become a thing is with the introduction of leverage, and it'll take a while for the financial industry to figure out how to get people to borrow in order to gamble in this particular casino.

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