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This is the real shame in the Oculus acquisition. If Oculus had been able to give away just 10% equity, every single Kickstarter backer would be $20,000 richer today. The sentiment would be completely different. The SEC needs to get in gear and start allowing equity crowdfunding pronto.

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.

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Indeed, I don't see anywhere else that Americans accept a "wealth test" to exercise a basic economic right (ownership of production).

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.

The reason for the accredited-investor regulation was to prevent people from putting all of their wealth into risky investments they know nothing about and being left destitute.

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?

I know it's a bit of a libertarian viewpoint but it is not the government's job to be my nanny. If I wish to throw all of my money down the toilet on some hopeless start-up I should be allowed to do so.

I would tend to agree in spirit but, of course, no one wants to throw their money away, they get tricked into doing so. Government does have an interest in the livelihood of its citizenry.

In a perfect world, it would make sense to let people tell everyone "buyer beware".

However in reality, some people do need protecting and the easiest way to do it is to "protect" everyone.

And Las Vegas exists for what reason, then?

Do you want to live in a country where other people can do equivalently stupid things and you have to deal with the consequences? No man is an island - some people are better making a burden of themselves than others.

We should have a rule that prevents people quiting thier perfectly sensible jobs to work on startups. They are risky as hell and when fali founders are burden to society.

This makes sense when the only actors involved are you, the start-up, and the government. In such a case, I would agree with you. To explain why such a case does not exist, I'll ask you this:

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 reason for the accredited-investor regulation was to prevent people from putting all of their wealth into risky investments they know nothing about and being left destitute.

Perhaps limit the amount that can be invested without accreditation?

Pro: few people are likely to get scammed out of life-damaging amounts of money.

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.

Nobody becomes destitute after funding a failed Kickstarter project because the amounts are small. That doesn't need to change. Limits could be in place. What needs to go is the $1,000,000 threshold for getting any equity at all.

The grandparent was explaining why these laws exist in the first place. Yes, perhaps they should change to accommodate new modalities, but that doesn't happen quickly (nor should it.)

Then why aren't there limits on lottery ticket purchases, or casino gambling, or making highly-leveraged real-estate purchases, or buying any number of other investments (including public stocks and options) that can send any initial amount of money to zero, quite rapidly?

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.

Well, for lottery tickets and casino gambling, people understand it's gambling (a game of chance). If someone came up to you and said "Give me $100K and I'll double it by the end of the year by gambling" nearly everyone will think "that's high risk!".

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.

Apparently historically many of the rules came about during the early 20th century US oil boom. Guys used to go door to door selling shares in can't go wrong oil stocks and then not only did some wells not work but often there were no wells at all and the insiders just stole the money. There was political outcry so laws were passed to stop selling direct to small investors. The rational to allowing wealthy investors to punt is that a) they can afford to lose, or at least do so quietly without causing a political stink, and b) can afford professional advice and get their accountant to have a look and so on. Investor protection laws are still useful - there are plenty of scammers out there - but I think could be updated. For example the government could have lawyers and accountants at least check out the money was being invested in a business and not just paid out to the insiders. In the UK we have some equity crowd funding which seems to kind of work.

This has been explained to you about 100 times already, why not start with your best argument instead of pretending the question has never been asked before? For the record I support raising equity through things like Kickstarter and lowering the accreditation threshold for small investments, but you're being extremely disingenuous here.

I don't recall any good explanations, maybe you could recount the best ones?

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?

The problem with small-scale investing is that the smaller your investment, the less you can afford to spend doing research and due diligence on what you're giving money to. Also, companies don't generally want to deal with a bunch of tiny investors if they don't have to, so even if it were legal most of the good investment opportunities still wouldn't be available to people who don't have enough money to count as qualified investors. This is apparently especially true of Silicon Valley VC, where everyone wants investors with good contacts.

Basically, it'd open up individuals to being scammed a lot more and the non-scams would still not be open to them.

If it was legal, there would be a kickstarter-like middle-man who would deal with this hassle, leaving everyone happy.

You can't buy lottery tickets with a credit card which seems like a rather sensible limit for most people.

Gambling is regulated. Loans for real-estate are regulated (sometimes imperfectly). Public stocks are simple and standardized enough that information about them is easily available and a buyer can be expected to understand.

>why aren't there limits on lottery ticket purchases, or casino gambling,

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.

Wow, way to live up to your name. There are many private lotteries, they're called raffles. Several times a year in SF there are billboard advertisements for the opportunity to buy lots in a raffling off of a house in the city or several million in cash.

Beside which, capital gains tax probably earns more for the state than either lottery or gambling income in many states.

Then why aren't pink sheets and over the counter stocks not banned also ?

Because you need to buy them from a regulated seller (stock broker).

The rules are indeed a little ridiculous, especially when juxtaposition against gambling.

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?)

The difference is that gambling firms usually aren't allowed to advertise by promising a positive expected ROI.

So you're saying there's a technical solution to this problem and the $1M threshold isn't necessary.

Here's an illustrative example of just how arbitrary these regulations are...

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.

- -

[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.

The real shame is not that the backers didn't a get a financial payout ('tho they should). The real shame is how Oculus' most passionate enthusiasts got burnt. They were in it for the shared vision but got a tough lesson in capitalism instead.

What exactly did they lose?

Faith.

what about the product they bought?

I don't expect financial payout from a McDonald's franchisee because I bought some hamburgers from them.

The $10 backers didn't receive anything other than a pat on the back.

Which is what they were told they would get.

I don't get the sentiment, those who feel they have been betrayed.

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.

> 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.

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.

I don't dispute they want the final product in the end. They agree with Oculus' vision so they back them up. But why are people feel upset?

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 are unreasonably conflating the legal situation and people's moral expectations. No one doubts that Oculus had every legal right to do what they did. People just feel it was unethical.

I'd replace unethical wth the word jealous. They see big money and want in on it. They fulfilled their kickstarter and they are not forever in debt to the whims of their backers.

Not really. The problem is not an aquisition per se, it's an aquisition by Facebook (one of my friends, a backer, put it as 'the only thing worse would have been Zynga').

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.)

Unethical? Moral expectations?

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.

I think the kickstarter backers are really both investors and customers. They are investors because they do take a risk by paying for a product that doesn't yet exist. This leap of faith from these "customers" allowed Oculus to create a 2 billion dollar product.

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.

Don't be ridiculous. That's not how it works. Every dollar, and then some, needed to be spent on the headsets. Oculus wasn't going to give away 10% of the company in exchange for negative dollars.

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.

I think a lot, probably most companies on Kickstarter would be ok giving 10% of equity to their backers if it was legal.

I don't understand your reasoning – the point of selling equity is to have more money available for immediate use. If they had followed this path, they might have raised even more capital.

$300 doesn't get you a headset AND equity. You might take $300 from person A to manufacture a headset to sell to person B for $300. But person A doesn't get both.

Is there a fundamental reason why Person A can't get both? Equity costs nothing to give out (excluding legal / accounting overhead) and could serve as a great incentive.

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."

> Equity costs nothing to give out

Only if your company isn't worth anything.

how about $400 getting you a headset and $100 of equity? You're being obtuse.

Yea, all those early BFL investors are really rolling in their unregulated equity crowd funding cash these days.

This reminds me of the same arguments that were made about Bitcoin and exchanges and how the mean old SEC wasn't letting the little guy get in on the action.

The same thing would happen in the world of Kickstarter - big asset bubbles and rampant speculation, bogus funding campaigns, graft, and exploitation.

>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?

If the gamblers are obviously addicted then I believe the casino is legally required not to serve them.

They do not. Laws governing alcohol do not cover gambling. (And even so, alcoholics have no problem getting regular drinks at their bars of choice, anyway, with few - if any - legal issues.)

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.

Kickstarter already has plenty of exploitative scam campaigns. I knew (I use the term loosely, more like I had to ban from a social group for being offensively rude to women) one of the guys that ran a successful kickstarter. He hasn't updated his project in months, and his last updates were about how he's only spent a small amount of the money, is looking for a new dev team, and wants to hire a web developer on the cheap.

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.

Kickstarter specifically prohibits equity deals with backers, as allowing them would place them in the crosshairs of the SEC.

FYI.

Wow, you just missed the entire point of his post.

Actually, the dude (heavily) edited his original post after a bunch of people pointed out that he didn't know what he was talking about.

Oh I see. This highlights an interesting flaw in the HN edit functionality - it can make the child posts look stupid.

Yes, and moreso to people who are not, themselves, terribly careful readers.

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.

It's honestly frustrating to go down a well-commented post and see a half-dozen "the title is misleading" posts... and then finally one that actually quotes the old title, basically nullifying the validity of most of the discussions one just read.

Not arguing with you here, but I just wanted to say that the point of this rule is to prevent people from getting scammed in large numbers. Allowing equity crowdfunding would also have to come with a bunch of new rules to prevent a company from claiming all sorts of fantastical stuff and then folding after everyone's pitched in.

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.

If a crowd funding website that was completely bitcoin based would it be able to avoid all SEC regulations? If there are regulations in the future is there a liability to creating this now?

No, There used to be 3 difference BTC denominated securities exchanges, Havelock, BitFunder, and some other one I can remember the name of. They were mostly based out of Canada then some regulators forced two of them to close and Havelock moved to a country in central America to avoid the same fate.

No doesn't work like that. Raising funds is raising funds whether it's in us$, bitcoin, pork-belly futures or whatever. You could list in another country like on Seedrs in the UK and then presumably be subject to UK rather than US law. Although if most of the investors and assets were in the US the SEC might still try to stop it.

It's better to address the problem directly (investor eligibility) rather than trying to invent technological end-runs around it, because the law is not deterministic and such technological instrumentalities are very transparent to regulators..

Kickstarter needs a no-acquisition clause

I don't think that would work. It would seriously diminish the possibility of kickstarter-based companies ever raising crowd funded funding.

But most people go to Kickstarter to fund the development of a particular product, not to boost the corporate entity that produces it. I mean, it's not that Kickstarter buyers are against people earning a living and making a profit, but something like 9 out of 10 Kickstarter projects are 'labor of love, we want to make it accessible to you as cheaply as possible,' as opposed to 'we want to build up a lot of buzz and then have a ginormous exit/IPO/get rich beyond your wildest dreams.'

So why can't it be both? If you are against my product becoming a huge hit after getting off the ground first via kickstarter then moving on to bigger markets with a possible windfall for the creator, and a better product for everyone due to a large IPO, then it sounds more like jealousy than anything else.

People want to feel in close contact with a dev team and part of a special club. If OR had gone on to be a huge company in its own right I don't think that would bother people much, but by getting acquired many of the early backers end up feeling on the outside, the real 'special club' is the one where you need enormous amounts of money to be a member.

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.

I think you mean it needs a "No acquisition by Facebook" clause.

This is a giant casino for people that have a lot of money they can afford to lose.

Could you elaborate on this a little bit? I've never encountered this before.

Would they really have offered equity though? I don't know.

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