SEC considers letting startups use social networks to raise money

Our startup's office used to be next door to what is affectionately called a "boiler room". These guys would essentially prey on old people and other vulnerable folks with various schemes related to penny stocks. And we'd hear the stories through the walls in this crappy office, in the elevators, etc. And it generally consisted of someone losing money (the client) and the boiler room scumbags making money.

And so while I'm all for free markets (my own startup's business is sort of predicated on it) and I do think that changes to the SEC rules should be made, I do worry about making this open season because the scumbags out there will find a way to take advantage of the opportunity quickly and at scale. That is what unscrupulous folks do, and they do it well.

Also, when it comes to tech investments in particular, even Fred Wilson says the best VCs bat .300 and the legends bat .400. That means many of the pros also bat .100. I don't know how Joe Public is going to be able to do this well when the professionals cannot.

Sure, we can say the SEC needs to regulate to ensure this doesn't happen, but as evidenced by our last crisis, that wasn't possible to do for multi-billion dollar organizations. I'm not sure they'll be able to do much for Aunt Sally who lost $10k on the Quora for Pets that she was convinced would be huge by some smooth talking cat with a slick PowerPoint.

This comment may go against the ethos of HN (and result in lots of downvotes), but I think there are some downsides if they go too far in opening up the market.

About time they dumped these rules. They are old and archaic. Companies should be allowed to raise money from whoever they want, and people who aren't as fortunate as 'qualified investors' should be given the opportunity to invest in high-growth companies. It would level the playing field a bit - rather than keeping all tech growth gains in the hands of a select few.

The solicitation portion of it is mad, our lawyer previously told us not to even mention on our website or blog that we are raising money, incase it is misinterpreted as public solicitation.

This is all that is holding Kickstarter et al back from running full fundraising rounds.

This is huge. If the SEC provides another exemption to Reg. D for crowd sourced funding, it could usher in a new age of financing for startups not just in the tech space but in all sectors.

I am a bit concerned that some unscrupulous people will use it to scam money out of naive "investors" through the use of crowd source financing services. The SEC would not have the resources to investigate at this scale. And I have doubts that local law enforcement would pick up the slack.

But even with the fraud risk, I believe this would be a net positive and lead to a lot more creative ventures.

In my opinion it would be a serious mistake to ease the current restrictions for investors; indeed, it might be even smart to raise the bar a bit instead. Money is a sensitive matter, and allowing everyone to invest in startups will only have negative effects for everyone involved.

For one, this is laying the ground for a new bubble. Startups are inherently risky, and you'll end up with a lot of small investors blowing up their savings on the gold rush of overblown valuations.

Second, one of the greatest effects of current rules is that most of the funds available to startups are the "smart money", i.e. they come with experienced investors (VCs and angels) who add quite a lot of value besides the cash itself. Small-time investors mostly don't have that added value; not only that, but by definition their capital will be sought after by inexperienced founders, who are more likely to fail without proper guidance (as more experienced ones supposedly have more contacts and mentors available).

And third, even though there is a lot more money available today, there is still some kind of filtering process before the startups are funded. Hell, even Yuri Milner doesn't throw his money blindly to anyone who knocks on his door -- he had relegated the process to the Y Combinator team, so there still is some selection.

In short, the day this new regulations pass may be marked as the start of the new startup bubble. Mark my words.

Personally I have been wishing for delivering material info publicly over social media services like Twitter to be allowed under Reg FD for a while now.

I think there are few things they should do to make this work: 1) Limit the amount of money per investor for non-qualified investors. If someone only invests a small amount, they aren't losing all their money on one investment

2) Requires disclosure all of company officers and major investors through an official SEC filings. Additionally, disclose any criminal record of securities violations and civil suits relating to misrepresentation and securities fraud for previous companies

3) Improve SEC enforcement, and be pro-active in going after fraudulent misrepresentation. Where companies appear to be making fraudulent misrepresentations, the SEC should prosecute companies that go too far.