SEC moves toward allowing crowdfunding IPOs
usatoday.com
usatoday.com
That said, I'm nervous about overzealous regulations. There are a few ways this can create severe enough adverse selection that healthy, high-caliber companies will avoid raising from the unaccredited crowd.
I'm still reading the details in the 585 page PDF of proposed rules but some concerns come to mind:
- Capping the whole round to $1m
- Forcing unnecessary financial disclosures
- Inability to use a single purpose fund for aggregating small investors (forcing every unaccredited to be a direct investor)
If you're a part of the startup ecosystem I encourage you to pay attention to this law, get informed, and give the SEC your feedback. These are only -proposed- rules and the SEC will listen and adapt (at least, they have in the past). Someday you may want to raise money or invest in a company!
So in theory they could add exemptions or weaken other clauses. I'm not sure exactly where the line is drawn (e.g. can they entirely rewrite the JOBS Act?) but I believe the rules outlined in the JOBS Act are mostly to express intent of Congress and it's the job of the SEC to implement them in a way that works and maintains the intent.
[1] They request comments on those ideas and more in the big PDF. See page 20 of http://www.sec.gov/rules/proposed/2013/33-9470.pdf
It sounds like you basically want Rule 506 offerings without the accredited investor requirements. Debate over the wisdom of that notwithstanding, this was never the intention of the crowdfunding portion of the JOBS Act to begin with.
I disagree with your interpretation of the intention of the JOBS Act. As I interpret it it's meant to allow all Americans the opportunity to invest in startups and small businesses while protecting them from losing all their money. Introducing regulations that cause severe adverse selection outweighs the benefit of those specific rules, in my opinion.
[1] I think the quality of companies raising publicly on Wefunder and AngelList speak to that, but I'm heavily biased. I respect your opinion even though I disagree with it. :)
Because you don't want people gambling with money that they can't afford. These regulations are about protecting investors while still opening up funding for startups.
As for how the market is behaving: I have personally heard several attorneys state that they're advising their clients to be very cautious about Rule 506(c) and according to media reports[1], this is the advice of many attorneys.
I am aware that companies are relying on Rule 506(c) for offerings on AngelList and services like yours, but in terms of the overall market for Regulation D offerings, this is a still a small number.
> I disagree with your interpretation of the intention of the JOBS Act.
You cited the $1 million cap as an example of a rule that is of concern to you. To my knowledge, this cap was an explicit part of the bill that Congress passed. As such, I don't see how the SEC could eliminate that restriction.
[1] http://www.crowdsourcing.org/editorial/ban-on-general-solici...
That's true, there's definitely subjectivity here. I make the assumption that YC companies are a proxy for "healthy, high-caliber" startups and my opinion of what will be deal breakers for that category of company is shaped by our customer development in the YC network. I could be wrong for a few reasons.
> As for how the market is behaving: I have personally heard several attorneys state that they're advising their clients to be very cautious about Rule 506(c) and according to media reports[1], this is the advice of many attorneys.
Indeed. I think there's a natural lean for attorneys to be more conservative and wait for things to play out a little. I believe that in the next year or two it will be commonly accepted, I've already seen a lot of attitude change over the past year. We'll see. I think this is something startups ultimately want - assuming all the concerns can be addressed. More fundraising options and a wider pool of value-add investors is a good thing if crowdinvesting can be done practically, IMO.
> You cited the $1 million cap as an example of a rule that is of concern to you. To my knowledge, this cap was an explicit part of the bill that Congress passed. As such, I don't see how the SEC could eliminate that restriction.
I did, in the 585 page document the SEC released they suggest a few adjustments to address the concerns people have. For example, the $1m limit might be applied to the fees collected by the funding portal.
I disagree with this. I'll take advice from 2 people that I trust and admire before I'll poll 10,000 people. In my opinion, it's a distraction. That's why I believe it to be more valuable to have a couple of very smart & helpful investors rather than a lot of people with individual opinions and voices.
Maybe a little off-topic, but in some ways, this is what I admire about Steve Jobs, is seeing what people wanted before they realized they wanted it. I don't know if it's real or not, but the quote attributed to Henry Ford, "If I had asked people what they wanted, they would have said faster horses" does hold a grain of truth. He could cut past the noise of the crowd to see the potential of an idea. Ask someone in 2004 what they wanted in a phone, and "bigger" probably wasn't on the list.
You can already do that, they should buy your product. If they are so jazzed about it, they should tell their friends, and it should be easy for them to do so through whatever your product is.
- Forcing unnecessary financial disclosures
From the proposed rules:
Section 4(a)(6) specifically provides for a maximum aggregate amount of $1 million sold in reliance on the exemption in any 12-month period. The only reference in the statute to changing that amount is the requirement that the Commission update the amount not less frequently than every five years based on the Consumer Price Index. Additionally, statements in the Congressional Record indicate that Congress believed that $1 million was a substantial amount for a small business. We do not believe that Congress intended for us to modify the maximum aggregate amount permitted to be sold under the exemption when promulgating rules to implement the statute. Therefore, we are not proposing to increase the limitation on the aggregate amount sold.
Where was this rule when greedy banks sold them expensive mortgages ?
Maybe the answer isn't limiting the amount that can be invested but increasing oversight on the companies people are investing in. No one wants to be taken for a ride even though the risk is above average in this case.
Uhm, the government encouraged much of the mortgage lending you're referring to. The loans themselves were artificially cheap. Unfortunately for borrowers, the houses were not.
Of course, the borrower gets screwed but who gives a shit about them. And if the housing market tanks the whole thing falls apart, but the market can only go up, up, up!
Out of all the "victims" in the housing collapse, MBS investors were arguably some of the more sympathetic. They were the true bag holders, overpaying (in the form of lower yields than was justified by actual risk) for lead that credit ratings agencies assured them was gold. Following the collapse, many any of them sued, alleging amongst other things, fraud.
On the list of "victims", many but certainly not all borrowers were less sympathetic characters. Some individuals had no problem lying about their income, and many others took out adjustable rate mortgages with the incorrect assumption that they'd be able to flip their homes at a profit or rent them out when their payments increased. It's hard to see these folks as anything other than willing participants in the game.
Floated at £3.30 now £5.30 in not much more than a week.
After the "British Petroleum" debacle, what sane company would voluntarily expose itself to such risks unless it had to?
Just seems odd that the SEC is fine with people investing in much riskier start ups than blue chips - arnt they supposed to look out for investors as well as companys
For example, PixelPin - https://news.ycombinator.com/item?id=6366343 - raised $240k at a $2.4m valation: https://www.seedrs.com/post_investment/9385#1976
In fact the only things I can find on Kickstarter that requested and raised more than $1 million are films [2]. There's people working on space telescopes who only requested $1 million [3].
So, I guess this type of funding could be used for the kind of things you see on kickstarter?
[1] http://www.kickstarter.com/discover/categories/technology/mo... [2] http://www.kickstarter.com/projects/559914737/the-veronica-m... [3] http://www.kickstarter.com/projects/1458134548/arkyd-a-space...
Would it work like Kickstarter except you'd receive shares of a company? Would there be a lot of overhead?
> These rules could reinvent the way companies raise money by allowing them to bypass the traditional costs of going public, which usually involves hiring costly investment bankers and accountants.
So instead of breaking the seat belt monopoly to reduce costs (work with me here), we'll just make it so that kids no longer have to wear seat belts anymore. It's absolutely brilliant in its sheer audacity. You get to keep your campaign contributions from the rent-seeking financial cartels, whilst simultaneously providing VCs with their retail lambs for the slaughter. The fact that they do this, whilst selling the idea as a positive act for the public has me slack jawed. That takes balls.
> Congress is looking for a loophole to allow smaller companies to get an exemption from the strict rules controlling the sale of securities to individuals. Congress is hoping that by using Internet crowdfunding, small and promising companies could gather capital needed to grow and expand from a wide pool of investors.
So we invent seat belts, and people stop dying. After a while people forget why we had seat belts in the first place. Let's take away the seat belts, because look, no one has died in a really long time.
Furthermore, why on earth would MORE risky companies need LESS disclosure. That makes no sense. If you were thinking halfway straight, you'd realize that it's the small ones that are the most subject to corruption, pump and dump scams and extensive stock promotion. Penny stocks CLEARLY indicate that this is the case. We need MORE disclosure not less. Costs are entirely derived from the IPO cartel. Break that you morons. Oh wait, you can't, because 20% of next year's campaign contributions come from your financial bosses.
> With the new rules, the SEC is looking to open the concept of crowdfunding to the public, while still offering investor protection. The new elements of the rules would cap any company's ability to raise money through crowdfunding to $1 million every 12 months. For investors with an annual net income or net worth of less than $100,000, every 12 months they can invest up to 5% of that, or $2,000, whichever is more. Those with an annual income or net worth exceeding $100,000 can invest up to 10% of that every 12 months. Securities bought through portals would have to be held a year before being sold.
Good luck regulating this. Capital limits are always exceeded by the determinedly stupid.
1) I would assume that you can invest at the same level of risk at existing public company (e.g. micro cup, or investing in options), the this point is mute.
2) core pillar of modern finance is portfolio theory . I.e. how to mitigate a specific company risk by investing in portfolio of companies (which is what VCs are essentially doing). Hence, this would also imply here (regardless of the amount of audit employed). So really a risk of a single company is a non issue.
1) Those are esoteric. People don't do them. However the dotcom boom shows us that they will fund bullshit stock issues.
2) MPT is bullshit. Systems fail in a cascade fashion, not independently. Furthermore investors do not diversify.