Aug. 1, 2012: When Oculus Asked for Donations
blogs.wsj.com
blogs.wsj.com
The SEC's classification of millionaires as "accredited investors" who get first crack at all the best investment opportunities is exactly the kind of "rich get richer" policy that people ought to be furious about. I think not enough people understand it.
Note, the accredited-investor rules are not an "ability-to-pay" test. That would be fair: if you can write the check, you're in.
The rules also are not a creditworthiness test: they don't evaluate reliability, and investors want to give money, not take it from others.
And they're not a competence test: you can be credentialed to professionally handle others' investments and businesses (through things like passing the bar or "Series 7" or CPA exams), or otherwise have degrees in law, technology, and business... and still not pass the same "accredited investor" wealth standard that any dolt who inherits a million dollars does, automatically.
The distinction ought to be abolished as a matter of basic fairness.
People on HN are pretty smart, but it's not representative of the entire population.
People get scammed by ridiculously obvious scams. Do you really think they have the ability to invest in a start-up in an intelligent way?
It's an archaic set of rules, from a dumber era, and totally out-of-sync with what people are capable of, and what real risks to "all of their wealth" exist today.
You can lose all your money doing real-estate deals or buying stocks, but those are regulated financial activities. Basically the gov't is saying "I don't want just anyone buying a private company, but I'm OK with allowing them to purchase equity in a public company because those companies are forced to be transparent."
Note: I'm not defending the law, just trying to explain the rationale for it.
It can't be because the rule provides strong protection of non-millionaire savings, because there are already endless ways for the gullible to lose all their money. It can't be millionaires are especially immune to common scams, because there's no evidence of that – and in fact quite a lot of evidence to the contrary.
Why not make these government policies wealth-oblivious, the same way they're race-, gender-, or religion- oblivious?
Why not base any necessary protections on objective tests of knowledge and ability, as with driver or occupational licensing?
Basically, it'd open up individuals to being scammed a lot more and the non-scams would still not be open to them.
Because they're profitable to the state. There have historically been blanket bans on both of these things at all wealth levels in the US. I still know of no private lotteries.
Both exist to exploit people who don't understand probability, and are essentially voluntary regressive taxes. When it comes to these two, now is the dumber era.
Beside which, capital gains tax probably earns more for the state than either lottery or gambling income in many states.
Perhaps limit the amount that can be invested without accreditation?
Con: might lead to a system where some scammers are skimming small amounts from large numbers of people, but not causing enough pain to do something about it.
However in reality, some people do need protecting and the easiest way to do it is to "protect" everyone.
Why is the most important piece of information Kickstarter shares with you the amount already pledged? You can see this in their page layout and in their various widgets.
The distinction is in the process of being removed with the JOBS Act. It was signed into law in 2012 but the SEC has been slow to enact the regulations. Hopefully it can be used to support the future Oculuses! (Occuli?)
In USA, donation-based crowdfunding is legal but equity-based crowdfunding is not. In Finland, it's just the other way around: a company can sell equity to private individuals, but it can't take donations [0].
In both cases, the proponents of the laws claim that the average citizen is dumb and would be ripped off if these protective laws weren't in place. Yet somehow Finns are smart enough to invest into private companies whereas Americans aren't, and meanwhile Americans are smart enough to make their own decisions about donations whereas Finns aren't.
Both of these laws are just historical accidents at this point. They made sense in an era where information was hard to acquire, but today you can just google a person's name to find out whether you want to invest in her project. Arbitrary limitations around crowdfunding should go.
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[0] More precisely, one needs a "collection license" from the police to take donations in Finland. This is only available to registered charities, so doing a Kickstarter is effectively illegal for Finnish companies and individuals.
I don't expect financial payout from a McDonald's franchisee because I bought some hamburgers from them.
First Oculus gave out the perks they promised to deliver, haven't they? That's the whole deal with backers. You back a project and you should receive the promised perk in return.
Another way to look at backer is to think of them as your first set of customers. I don't see why Oculus should return equity even if KS allows them to do so.
If the option was "give us $10,000 and you get 0.1% of the equity then would we still have this discussion. Obviously not. But the contract these backers signed up for was just the perk.
People are mad because funding the project through kickstarter created some expectations that were not met. Funding through kickstarter feels like you're investing in grassroots human projects, but this made people realize that it's really just business as usual.
You don't back a project just to get the perks though most of the time, you back a project to support a company grow and thrive.
IMO they clearly broke the social contract between them and the backers.
Two reasons:
1. Some people feel they are entitled to share the acquisition because without their early support (via KS crowdfunding) Oculus may never get that $2B acquisition, or/and
2. They dislike the acquisition and they feel entitled to have a voice. Like public trading companies shared holders should have a say in the company's direction and the company is responsible to maximize shareholders' profit
Either one or combined.
If the deal is clear from day one, which is that you, the backer, will only receive the perk as promised, and any penny you give to the project will be used to keep the project growing. But you don't have any say in the project, because, they never said they will let you be a shareholder. They are not going to discuss acquisition with you, because, this is a private company. Fan support is essential to keep a project like this growing. But business is business. If you think you are better off with some extra $$ in your pocket and getting a powerful parent looking after your project at the same time, you probably should take the acquisition.
You choose to use a product. The company can be acquired or shutdown. So making either decision is now unethical? How do people do business now?
You choose to backup Oculus and know from the beginning you are not going to have a say in the business' future, so where is the moral and ethic responsibility? What would be unethical? Take the "seed" money and run away without delivering a product. Oculus delivered a prototype and they didn't run away.
Imagine there is a company who you don't trust at all and who, in your eyes, has a history of betraying their users (in this case, with the changes and defaults in privacy settings, and the web stalking... ).
Now imagine this company buying a company you care about, who had the air of being honest and open and which you trusted. Since you do not trust the first company, you can now effectively no longer use the product of the second.
(While this may look a bit like paranoia, I know people who think like this.)
If the SEC does allow equity via crowdfunding you'd have to be relatively insane to take them up on the offer. It just doesn't make sense.
Effectively, a project would say "Hey! Give us $300 dollars. We might get you this product we're trying to build, but we also might fail at delivering. Here's some equity too, to help compensate for your risk."
Only if your company isn't worth anything.
The same thing would happen in the world of Kickstarter - big asset bubbles and rampant speculation, bogus funding campaigns, graft, and exploitation.
I see. So what do you call a roulette table with obviously addicted gamblers throwing their money away, then? Good old American fun?
Problem gamblers must self-exclude and the casinos then must do their best to adhere to these lists that the Nevada Gaming Commission sends out. (And casinos are very good, if not infallible, at doing this.) But the person must exclude his/herself.
I knew it was a scam from the day I learned of it, just based on this guy's character and inexperience.
I can assure you that equity would be no different, unless the investments could be protected by law in some way. I don't really know how to prevent this sort of thing, investors needs to do their homework, but even that's not always accurate.
FYI.
Savvier folks can read a string of knowledgable corrections to a point that (apparently) wasn't made then work out what must have happened easily enough.
Just think how this would work - people can't even be bothered to read their ToS or Privacy Policy for Facebook. You think they're going to pour over an operating agreement to become an equity member for a company? This rule was enacted as a quick and simple way to prevent people from being fucked.
Also, while it can be both very often in the real world it becomes one or the other - think of all the not-nice things that corporations o on the basis that their investors' needs come first. You're just going to have a harder time funding stuff if your pitch includes a non-ironic desire to make megabucks because a lot of people will be put off by that.
"And I did not chip in ten grand to seed a first investment round to build value for a Facebook acquisition."
http://notch.net/2014/03/virtual-reality-is-going-to-change-...
It would be nice if kickstarter campaigns could add equity as and option in the reward tiers, but it's not like these people gave their money for nothing in return.
People right now currently feel akin to a benefactor who put a kid through college only to have the kid turn their back on them down the road once they're successful.
I don't understand any of your reactions to this. They took money, and so what? For a site that is dedicated to the entrepreneurial spirit, making it big, and "disrupting industries" you sure could have fooled me.
Honestly, it feels that for all the talk about the huge future of VR by Oculus, if they really believed in it, no number would be big enough to get them to give up control of how that future is built. Most entrepreneurs who are in the business of changing the world are not that interested in relinquishing any control to someone else no matter how much that will get them paid.
I'm pretty sure I know what the deal is here, that Facebook basically told them that they can take their investors out of the picture and have the full resources to build the best consumer product they want to with custom hardware. This certainly would sound enticing but the problem is that as soon as the going gets tough that lack of absolute control is going to start to rear its head. Zuck is going to have the final call on everything, and when the VR wars heat up you can be sure he is going to make different decisions than an independent Oculus would.
Palmer doesn't want to run a company, he wants to make VR a thing, and the same goes for Carmack. You have no idea what the terms of the acquisition was, so don't throw around your conjecture about who has the final say on what. Why don't we just wait and see what the outcome is before we go all Harry Caray.
Risk is exactly what investors bear in exchange for a potential return. Companies require investment because they don't have the capital to get things moving upward otherwise, which is exactly the need that Kickstarer fulfills.
The unwritten deal was that the funders were backing a low-overhead, indie organisation.
It's like a pathetic jealousy of wanting to help a homeless as long as you know they are never going to be richer than you.
Often, when companies get big, the motives change from "making a great product" to "milking the user for more money".
1) Kickstarter is not an investment platform.
2) Kickstarter is not a store.
If you give money to a kickstarter for any other reason, despite what the campaign or your friends or some blog tells you, you're quite unfortunately doing it wrong.
> Project Creators are required to fulfill all rewards of their successful fundraising campaigns or refund any Backer whose reward they do not or cannot fulfill.
They may have thought they were giving money to an idea to help it succeed, but in retrospect they were providing early-stage seed funding for 0% equity exactly as the article says.
Of course, how much people who put money into things on kickstarter expect to get a product versus how much risk they are expecting to take is an open question.
Also, I find it deeply upsetting that I am be allowed to give my life savings to a startup founded by a friend or family member, but I can't do this with a stranger...because the government wants to protect me or something.
But, really, I can't really blame regulators for this paternalistic policies since most people blame the banks for the financial crisis while pitying those impoverished home owners who stupidly purchased homes they couldn't afford.
1. Making a donation to a company. [1]
2. Preordering something that hasn't been built yet.
Doing 1 is silly, since you don't really get anything in return. "But it makes it more likely that this thing I want will happen!" In some tiny marginal way, sure, but mostly it's going to happen because other people donate (or fails to happen because they don't). Don't be the fool who tries to personally take on the collective action problem. And stop trying to make other people rich out of the goodness of your heart.
Of course, as the WSJ fails to make clear, most of Oculus's Kickstarter money wasn't straight-up donations; it was preorders of the Rift. That's obviously not a donation, but it's not a good idea either. As the buyer, you bear the risk that it never ships at all. "But I'm compensated with a discount!" Essentially, you're making an investment in which your returns come in the form of future discounts on a product. Forget that you like the Oculus Rift for a second; is this a wise investment structure? If someone set up a VC company that did that instead of buying parts of companies, would you think that was smart? Did you do any kind of analysis that suggests this is actually works out to be a good investment? Do the potential returns even justify that analysis? Do you think of other consumer products this way, or only shiny electronic things?
Or to think about it a different way: imagine if someone set up a store that worked like this: you take your item to the counter, where they don't actually let you buy the item. Instead what you can do is pay the price minus n% and then they roll this big roulette to decide whether you get the product (m% success rate). If you win you get to keep the product and if you lose it goes back on the shelf and they keep your money. To spice things up, they don't tell you what n and m are either, just the price to play and whether you get the item. Now, it's possible--though unknown--that m and n work out that you're EV positive here. But would you really shop at that store? Especially when there's another store next door that just sells you the same stuff at a known price (i.e. just buy the Rift when it comes out).
The fact of the matter is that you're aren't pre-buying the Rift on a rational basis. You've been convinced by clever marketing to shoulder risk for a company because it seems cool and feels good. Total sucker move. That probably explains why it tastes bitter when the company whose capital requirements you fronted rolls that into a $2 billion dollar acquisition.
[1] Maybe it's not a company. Maybe it's a cause you support like improving CoffeeScript or something. For those cases, I withdraw my objections.
You seem to live in a universe where everything goes according to plan, that's not any real universe I'm aware of.
Kickstarter is about being a patron of creators for specific projects. Sometimes those projects are by people working in good faith, sometimes not. Sometimes those projects succeed, sometimes not.
The idea that this is somehow unusual is ridiculous. The idea that it should be discouraged is actively harmful. One of the most powerful things anyone can do with their money is to fund the development of things which change the world. Create products they wish existed, create art they desire, support creative or productive people, help others, etc.
That's exactly what Kickstarter solves. My $10 probably wouldn't help much, but the $10 of thousands of backers will actually do something.
This is the point that many commenters are missing.
Many of the comments here are addressing the straw-man argument of the legal aspect of the transaction (yes, technically the backers are not owed anything... but we know that).
What the WSJ post questions is the ethics of a KS Project making a human to human appeal to the heart and ask for donations when in reality it is a Corp asking for debt-free seed funding from regular people.
If Kickstarter doesn't want a cut of that money I'm sure Indiegogo will be happy to take it
it was "18 months ago Oculus did one of history's smartest rounds $2.4M for a 0.0% stake (wsj.com)