Kickstarter, but With Stock
slate.com
slate.com
But even with 20 years experience in startups, I can't put $40k into a startup's round?
Slate would say I need to be "protected" from that?
Sorry, in this case, the regulations that only allow the well connected and wealthy to invest in startups also serve to keep those with domain expertise out of the market.
All too often regulations are used to exclude competition. This is one example.
With a startup, information asymmetry virtually guarantees that crowds are least qualified to judge whether it will succeed. It's easy to trick people, and that's what the legislation is protecting against.
Not quite. That's certainly true for roulette, and maybe craps, but only marginally true for poker, blackjack, pai gow, etc (although those odds are researchable). For machine gambling, the odds are dynamic, and the casino is allowed to non-transparently manipulate them.
With a startup, you could lose your money because the founders got into a squabble.
Casino vs startup investing is therefore an invalid comparison.
It's harder to estimate with startup investing in the case where you do your homework on both, but I think that if startup investing is heavily advertised as being a complete crapshoot with potentially huge returns, but most likely a complete loss, then people should be allowed to experiment with it. The proposed rules have spending limits to enforce that it's just dipping in, and not people dumping their life savings into things.
For machine gambling, the odds are dynamic, and the casino is allowed to non-transparently manipulate them.
Now consider a company selling itself. With no rules, they are able to say anything they want about themselves. The stock market is seen by many (most?) as an investment, and therefore fairly safe (possibly even safe). How well dispersed is the knowledge that, while investing most of your money in the market is relatively safe, investing it in one dstock is horribly risky? How easy is it for a semi-reputable (much less disreputable) company to paint an overly rosey picture, appealing to somebody's hopes and dreams?
I completely agree you should be able to invest. There is a real problem with how qualified investor is defined today, but I'm not convinced removing that concept is a good idea at all.
Well, now, that seems to be what needs to change. Institutional investors rightfully treat non-AAA investment products with all the respect of used toilet-paper (with the mortgage crisis imparting the further wisdom that a AAA rating is a necessary, but not sufficient condition for a product to be a safe backing investment for consumer savings.) How can we get consumer investors to see things the same way? Put big black bars across the tops of stock certificates like they have on packs of cigarettes?
I don't know where you extract that there are "no rules" in crownfunding stock. The stock market is crownfunding by nature. At first NY Stock market was a tree under which interested people traded part of their companies.
With more than one hundred kickstarter projects backed on my belt, I have been duped in... ZERO.
They are free to say whatever they want but it is very easy to catch a liar.
Part of my family comes from socialist East Europe economies. In those places even very smart people like nuclear scientists or very bright philosophers were protected "for their own good" against taking risks(or doing anything on their own by the way, good competent people were dangerous if they did good things because it made the very incompetent look bad).
The only problem is that "protectors" were very Mediocre people, people that spent their time banging pretty girls and drinking Vodka. Bureaucrats whose only merit were kissing asses of someone higher in the monopolistic hierarchy of power.
Let me be a grown up, an adult who takes his own decisions.
On any given day, there are millions of English-speaking people on the internet. If you can capture the hope and imagination of those people, they will give you money, and the total amount you receive will be significant. Alternatively, if you can convince a small number of them to give you a large sum of money (à la Occulus), your result will be the same. This, obviously, requires the right sort of idea; one that resonates with large numbers of people, or resonates so strongly with a small number of people that they're willing to part with hundreds of dollars. But it's quite possible, and I see no reason why a serious company wouldn't explore this possibility.
On the other hand, after reading some history about the concept of the stock market, I think legal protections aren't a bad thing. The goal is to protect uninformed consumers from predatory behavior. It's an important goal, because no one likes admitting they're uninformed (least of all to themselves) so you end up in a situation where people are throwing around their nest eggs at emotional appeals (companies who convince you that they can make your fantasy happen). It's easy for people to convince themselves they've stumbled onto a big opportunity, and it's rather easy for them to believe in it so strongly that they're willing to invest large sums of money; sums they sometimes can't afford. If their investment disappears, so does their ability to participate in the economy. The history of the idea of stocks is filled with this sort of behavior, and sometimes the consequences can be disastrous. Due to information asymmetry, those tempted to invest in a new phenomenon are usually the ones least qualified to judge whether the phenomenon will yield returns. Hence, predatory behavior, and the original motive for protective legislation.
There's a balance to be struck between taking advantage of small sums of money from millions of people, and protecting those people from dumping money they can't afford into a new phenomenon. Some tasteful regulation isn't necessarily a bad thing.
This is a very real problem.
However, I have an especially hard time believing the government can make Internet-based regulatory initiatives work at all. In the modern day, where what is right and what is wrong is increasingly fought for over social media, I have to wonder what the role of government will be. Saying we need regulation is a nice thought, but it's going to run up against some practical realities that make the current regulatory regime particularly ineffective.
For example, Counterparty [1] enables anyone, located anywhere in the world, to raise money from anyone else anonymously with Bitcoin. It's "pseudonymous", but come on. Is the SEC ready for that world? We are about to witness a completely unregulated global securities market take shape, and we have a government that can't make Healthcare.gov! The most interesting question to consider is how do we protect consumers in a new world where they will be faced with countless, potentially anonymous securities offerings from complete strangers, many of whom will be located overseas or engaged in gray area trades. Talk about a nightmare for slow-moving bureaucracies.
Your comment was good. The autokill was unrelated.
UK crowdfunding websites for reference:
So it's crowdfunding, but not in the "everybody can play" model the article discusses.
http://www.seedrs.com/faq/items/65_what_are_the_eligibility_...
http://www.legislation.gov.uk/uksi/2005/1529/schedule/5/made
Kickstarter in particular is about rewards and/or patronage. There is an avenue for equity based crowdfunding elsewhere, the question is whether there is a big enough demand on the consumer side (with people who have little information about the company) and the business side (with founders who don't want to share equity). I'm not referencing AngelList, but rather companies who would run Kickstarter-like projects.
Edit: spelling
A single non-accredited investor may not invest as well as an experienced angel investor. But the idea is to invest with "the crowd". The funding sites will help with some of the due diligence, and people will gravitate to the most promising startups. Instead of providing advice individually, the crowdfunders will provide group feedback, marketing, etc. And they'll be able to diversify just like angels, since they'll invest smaller amounts in each startup.
This assumes Oculus would have sold 100% of its shares at a $2 million valuation, and then still sold again for $2B after the developers had cashed out.
It's a nonsense comparison.
Yes, fraud can happen in crowd-based equity - that's not what I'm talking about though.
What is laughable is that the one thing the SEC is supposed to monitor (the stock market) is the single biggest fraud perpetuated on the American people. It is where young, naive people like myself put their life savings only to have it crushed by people who were richer than me, who could generate volume on whim, perform insider trading while not worrying about the consequences, and take bailouts from a government that milks the rest of the population for taxes. I'll honestly be damned if the SEC isn't in the pocket of those who would benefit from it.
http://blogmaverick.com/2010/08/20/the-stock-market-is-still...
and here:
http://blogmaverick.com/2008/09/08/talking-stocks-and-money/
(I don't always agree with Mark Cuban, but most of what he says here seems pretty sensible).
As far as investing goes, I always seemed to be pretty "good" - or at least, lucky. It was not unusual for me to make a few thousand dollars in a week (and occasionally lose a little). I typically never invested in very risky prospects, always things that I knew would be around for quite a while like Google and Apple.
I made the foolish mistake of investing in Freddie Mac and Fannie Mae, companies that were once labeled "too big to fail" (and now trade OTC, if at all - have not checked since they became junk). Actually, my "mistake" appeared to be a brilliant move at first, as I made $30,000 in a few hours. But in a few more hours, that number was negative. However, I was not investing out of speculation, I invested because I thought that these companies were going to survive the recession - in fact, because of a statement from Hank Paulson (then Secretary of Treasury) who said that the government would not be taking over these entities (they were GSEs, but publicly traded). Hours later rumors turned against this, and within weeks it was trading at $0.25 or less (down from $7 to $11 a share where I originally was trading it at).
But it gets better - little did I know (at the time) that Paulson was a Goldman Sachs alum: http://www.nytimes.com/2008/10/19/business/19gold.html?pagew...
And that he gave advance word of their failure. Some people might call that insider trading, but, what do I know? :)
http://www.bloomberg.com/news/2011-11-29/how-henry-paulson-g...
15% on money that never has to be paid back? If we're comparing to Kickstarter, fees are at least 8% and you are contractually obligated to supply a product.
>For comparison, underwriting fees for a large public offering are usually under 4 percent.
Why are we comparing this to a large public offering?
How much equity would you put on the table and how much money would you want for it? Keep in mind that if you have a good pitch you can bring in $1,000,000 for no equity and if your game is successful it could bring in another $3,000,000 to $10,000,000.
Also, it requires that you have a (typically consumer) product that you can pre-sell. What if you are making a Saas that could turn into a profitable business but that cannot be launched on Kickstarter? It might still be a good investment opportunity so the other model could work.
I wonder what fair numbers would be. Hrm. Hard to say. A lot of 1-4 man small teams would do it on second thought. I think $100k for 10% is a pretty crap deal but creators would probably take that offer. Hard to know how Joe Public would respond. Definitely hard to predict after 5 years when people compile lists of games that even gave a break even return. Game companies and software startups don't exactly have a high success rate.
"0.000001% ownership per $10000 you invest"
"Sure, LOL, why not"
Now that we've established it could make sense, tweak the numbers to an equilibrium. Unless you've calculated that equilibrium, found it unworkable and skipped that step in the conversation and would like to enlighten us!
I just don't see this happening without support from government regulatory body and without it, the result would be disastrous.