Senate Passes Amended Crowdfunding Bill, Emulating Kickstarter Model
idealab.talkingpointsmemo.com
idealab.talkingpointsmemo.com
What became apparent is not just that crowdfunding will open up all sorts of revenue to startups, but that it will also create opportunities for new services dedicated to the crowdfunded startup industry.
Just as now we have startups whose market is startups and their needs, so too crowdfunded companies will need specific guidance and services in terms of how to structure offers, issue press releases and other information packets to deal with hundreds or thousands of small investors, respond to questions from these investors, and perform other duties different from those that are needed by startups who fund from far fewer and more sophisticated investors.
I think if I knew a few financial lawyer friends and had some capital, it might be a good place to be.
That's the reason why there will be a panel dedicated to discussing crowdfunding at the upcoming startup conference in mountain view (http://thestartupconference.com/).
Literally, all content from the article about crowdfunding is: "The crowd funding proposal has some merit. Companies could seek to raise up to $2 million through individual donations up to $10,000 each or 10 percent of a person's income..<snip>.. But in its current form, even the crowd funding piece is problematic because it provides little oversight of the process by letting just about anyone into the fundraising game."
I can understand why it is 'instinctively' bad to not have any oversight into the funding process, but how is letting just about anyone into the game bad? It could even have positive impacts to startups like mine who don't have valley/VC contacts but know individuals who could spare 10k.
Given that the costs of starting up have plummeted, it makes sense to allow crowdfunding while removing the auditing/legal requirements because crowdfunders would be taking lesser risk than investors of yore. Practically a certified investor (1m+) has the capability to invest in 100 startups before (s)he can invest in 1!
Some params are good, some params are bad.
It's not that letting anyone into the game is bad per se, it's that some params are bad and will try to defraud small unsophisticated investors and it is probably easy to do so.
Congress and the SEC presumably would like to gain the advantages of crowdsourcing but also want to protect the small time $10, $50, $100, $1000, $10,000 investor.
What's to prevent "pump and dumping" of startups?
I'm not being facetious. I've been wondering this for a few days now and feel im missing something obvious.
I mean KickStarter is akin to donation. There is no expectation of getting your money back plus a return.
This seems ... I don't know ... kind of bush league. Who would do this? A team might have, I don't know, thousands of potential 'investors' who they would have to keep happy. What about follow on rounds? So many people are lawsuit happy now a days as well. Just seems... I MUST be missing something.
Getting back to what you said, some people will commit strait up fraud and some of them will end up in jail. But, overall with these changes I don't think fraud is going to be more of an issue than it already is.
Ideally a startup seeking crowd funding is more open and transparent than a larger company would be, and investors would be more knowledgeable about the company.
Additionally, in some ways "pump and dump" is more obvious with smaller companies, you can't easily hide among a large volume of anonymous transactions.
Make no mistake, there will be fraud, there will be pump and dump schemes, there will be people who solicit funding then just take the money and run.
But hopefully that sort of thing won't be terribly common and won't spoil the huge benefit that crowd funding could be toward getting small startups off the ground more easily than they are today.
fraud is not impossible, but that goes for anything else as well - buyer beware and diversify. do you really need or want the government assuring you that an investment is ok?
For most of these little companies no advantage is lost by reporting cash flow, transactions and other relevant metrics. All easy to calculate. The new services around these little companies should be accounting support. Instead all we are going to get is "social proof" followed by an info blackout.
Perhaps this will help "create jobs", but not for those who want to participate in any aspect of providing capital, borrowing capital, or facilitating such an exchange. The only jobs created will be for those who have the skills to navigate bureaucracy in order to lessen the increased deadweight loss this bill will create.
Edit: apparently something was illegal, but the article failed to mention it. Still not sure what that something is.
Investors had to be qualified in any number of ways and you couldn't accept money, especially small amounts of money as you would in crowdfunded companies, from anyone less than a sophisticated investor (net worth over $1M).
The new thing here is that soon it will be legal to do just what Kickstarter is doing today but also add the option for supporters to purchase equity in a venture. Think: micro-IPOs. So instead of just pre-ordering the Double Fine game or getting a sweet poster or lunch with the team you could also maybe invest in, say, 2% of a company set up for the project which might net you a fincancial return if they make a profit.
That sort of thing will now soon be legal. It's still limited due to the weight of excess regulation but it's a step in the right direction.
The article fails to make any mention of what precisely is currently illegal. I'm still not clear on that. What crime would I be committing today that will soon not be a crime?
Boom, you've just broken the law. Right now the number of intermediate steps between 1 and 2 are ENORMOUS. It's very, very difficult to do #2. The regulatory burden is significant and the limitations on who can invest and how much are also significant. Even something as simple as, say, trading 1% of your company to a friend in exchange for $100 is illegal. Your friend isn't a qualified investor, for example, and your company likely isn't set up properly to be traded.
That's why we have the standard investment track that we do today. There are co-founders and employees (who can have equity) and there are angel investors and VCs. But there's not your friends and family, there's not interested individuals on the other side of the country, because those people don't meet the requirements to be "qualified" investors. Essentially, the system has been set up so that at the level below a publicly traded company investors have to prove that they aren't going to go broke by investing, they have to be rich enough so that the risk of losing investments won't risk putting them in the poor house. That's why angel investors are all rich. There's no such thing as a working class angel investor who just barely manages to take home mid 5-figure incomes per year.
But with this law that's changing. You will be able to set up a company, with some hassle but not nearly as much as before, that will be able to take $100 from your friend in exchange for 1% ownership.
Think about the implications of that. A site like kickstarter is very much dependent on pre-orders being a big part of the "donation" / investment aspect. But what if you could not just donate or put in pre-orders for projects on kickstarter but merely help finance them in exchange for a piece of the action? Think about all of the projects on kickstarter that you think are a really good idea and seem likely to be successful but that you don't actually want anything from. Or think about projects you would like to support and think would be hugely successful and you do want whatever they're making but you can't justify a higher level of support because the return doesn't seem worth it. Or think about projects that could potentially earn revenue but that can't easily do pre-orders. As a really "out there" example, let's say I had a new way to build giant dump trucks for mining. Pre-orders don't make sense because only a few mines are going to buy the things, but showing people that I know the business and proving I have a good idea and soliciting funding in exchange for equity and profit sharing might still be worthwhile.
That said, I've many times been annoyed that I couldn't invest as a middle-class shmuck. Some companies I wished I could get on: AirBnB, GetAround, Occipital, Disqus, Twilio. Obviously I'm recalling w/ survivor bias, and there's no telling if those winners would have been happy to sell at a price I could afford (I don't have the juice VC/angel giants have), but I look forward to finding cos that I believe in and are happy to take my money.
Edit: actually, I'll make a few prospective calls in case they want to call me:
MindSnacks, Ask Your Target Market, Lovely, Beamit.