SEC Approves Equity Crowdfunding from Unaccredited Investors
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The reason I am concerned is that the last tech bubble was fueled by retail investors who got to buy stock in companies that IPO'd (but shouldn't have). A lot of people invested their savings into companies they were not prepared to evaluate reasonably. Relying instead on "trusted advisors" who often were financially invested in the stocks they advised going up.
No doubt there are some really honest and worthwhile crowd investing companies, just like there were honest and worthwhile financial advisers in the 90's and honest and worthwhile Mortgage brokers in the naughts. But their existence will not deter nor mitigate their dishonest counterparts who will ruthlessly, and with all the tools available to them (legal and otherwise), separate people from their money under the guise of "getting in on the ground floor of the next Google or Facebook." I want with all my being to be wrong about this, and would love for people five years from now to be able to see this comment and say "Gee what a cynic, he really didn't get it did he?" But that future is not the one I expect.
In the 90s, the companies were issuing to be publicly traded; which means retail investors were free to put their whole income into a stock if they wanted to. Here they're only allowed a percentage of their income depending on their income bracket (over $100,000k or under). There's also a 30% cap to sell, which is far better than selling the whole entire fridge.
That being the case you can guarantee there will be commission-earning intermediaries or platforms misrepresenting the concept of portfolio diversification to encourage people to invest in as many startups as they can afford...
In fact there's no paperwork or legal counsel required to play at all!
Can equity crowdfunding be placed under this same "highly regulated" regime that Vegas is under, so that anyone can walk up and participate at any time?
The securities market isn't a place to have fun, it's a vital machine on which all our prosperity depends.
Treating stocks as a blind gamble means money is not chasing the best investment but is being scattered randomly or by easily manipulated rumors.
Anyone who buys stock as a blind gamble should be deterred. Not to protect them but the rest of us. The same way children shouldn't play with matches; I don't care about burning their little fingers off I care about burning the house down.
So no, it's not like Las Vegas.
I'd like to see evidence of this.
Where there are inequality issues, surely the safest thing is to just adjust tax rates and social spending to fix those. Viewing securities exchanges as a possibly useful machine that needs watching is much better than turning it into to a gambler's play ground for no good reason.
It was said that our economic prosperity depends on the securities market. Im calling bullshit, and simply repeating the claim doesn't make it more true.
They like to gamble, even if, maybe especially if, the odds are against them.
I'm have a math major. I know that i'm likely to lose money playing roulette. yet i'll put a few dollars down when i'm on vacation on a cruise ship because it's entertaining and fun. the difference is that i view it entirely as an entertainment expense, and limit myself to a reasonable amount of money (that is generally really low). How much entertainment i get (how long i get to play) depends on how lucky i am. if it's gone it's gone, there is no getting more out to play longer (which is where people who are addicted generally struggle).
Vegas expectations = always negative, no matter how much time or thought you put into it
Private investing expectations = usually negative, but sometimes positive (and more likely positive with experience and effort, or within domains of personal expertise)
So why is the first a better deal to open to everyone without regard to wealth, whereas the second is so dangerous it must be encumbered with wealth-tests (not knowledge/skill/credential tests) and major legal barriers/overhead costs?
Here's an idea: let anyone invest, on the same basis as a traditional "accredited investor", whatever amount of cash they could also obtain, via withdrawals or loans, at a casino cashier cage. If it's OK to hand someone $10-20K in chips for negative-expectation games, why not let them invest $10-20K in maybe-positive-expectation learning experiences, without prejudice?
But then those same people – no matter how disciplined – must face large (practically insurmountable) paternalistic legal barriers against putting even a few dollars into private investments? Even in domains where they have personal expertise? And where the results can be positive-sum for all involved, rather than strictly zero- or negative sum?
The nonsense is still strong in the dichotomous regulation of gambling and investments. It's almost as if the paternalists want to protect poor people from becoming wealthy!
The new SEC rule affects disclosure and allows more ill-informed investments.
Also if you gamble in Las Vegas it doesn't destroy the tech industry as a side effect like a bubble will.
The rule did not protect naive investors from themselves, it protected them from fraud and the economy from bubbles.
If anything, by creating a bubble environment the change will benefit the wealthy at the expense of naive later investors and can be pitched by populists as "wonderful" deregulation.
>Rather than remove the exemption, the SEC has effectively removed the disclosure requirement. The rule did not protect naive investors from themselves, it protected them from fraud and the economy from bubbles.
That is just simply not true at all.
Interesting how making completely vacuous denials devoid of any support utterly fails to advance a conversation. Perhaps you will explain what the point of wasting time typing them is. Or let me guess, the reason is "here's a down vote".
I am less interested in finding some sort of constructive area with you as I am keeping you from misinforming the people who might read your comment and accept it as true.
That is not a waste of time.
If you must have detailed sources and point by point rebuttals, rather than 'vacuous denials' (who's wasting time now?) here you go:
> Rather than remove the exemption, the SEC has effectively removed the disclosure requirement.
Title III created the Securities Act of 1933 Section 4A which states, among other things that "s to reduce the risk of fraud with respect to such transactions, as established by the Commission, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person"
Along with all sorts of information regarding the business including "(I) the income tax returns filed by the issuer for the most recently completed year (if any); and (II) financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects;"
And
"financial statements reviewed by a public accountant who is independent of the issuer, using professional standards"
And "the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer; "
And "not less than annually, file with the Commission and provide to investors reports of the results of operations and financial statements of the issuer, a " And on and on and on.
http://www.sec.gov/about/laws/sa33.pdf
So, there is a significant discosure requirement despite your assertion to the contrary.
> The rule did not protect naive investors from themselves, it protected them from fraud
That much, at least, is true, but it suggests that the new rules will not which is false as shown above.
> and the economy from bubbles.
This also suggests that the new rules will form bubbles. While that is always a risk, the amount each business can raise and the amount prospective shareholders will be able to invest in these entities is limited, so I don't think this adds significant risk of new or bigger bubbles.
Now the record is straight and those that read these comments will have immediate access to the truth. It might not leave much room for whatever conversation you were planning on having but it is a worthy use of time nonetheless.
For example, a few years back there was a Ponzi scheme in the US called PermaPave which took money from a bunch of small investors on the pretext it was being invested in environmentally-friendly stone paving slabs. They didn't make a single cent in profit from the slabs - all the payments out came from other investors' payments in. When the whole thing imploded none of the small investors could afford to do anything about it. Unfortunately for PermaPave, they'd also taken a much larger investment from a company actually interested in buying stuff from them, and when they breached their contract that company had the money to investigate them, figure out that it was a Ponzi, and sue everyone involved.
Another problem is that companies don't want to deal with a load of small investors if they can raise money from a few rich investors instead: it's a lot more work and expense for them, the small investors don't have the same kinds of connections and expertise that the big VCs have, etc. The main reason to raise money from ordinary people is because you're a scammer and big investors have the expertise to spot you, the resources to investigate you, and the money to sue you if they do invest. (The less money you invest, the less you can rationally justify spending on due diligence.)
Ordinary people are at a fundamental disadvantage to the rich here no matter whether they're legally allowed to invest or not.
The "accredited investor" rules are an imperfect but functional selection mechanism to select for 'understand risks' and they also add the defense that once you lose enough money to fall below that standard you lose the opportunity to keep playing.
Further, anyone, in the US at least, can become a "rich person" by investing in publicly traded companies (or real estate for that matter) prior to investing in non-public companies. Many thousands have.
And finally, I grew up in Vegas and watched it kill people. Mostly people who managed their pennies and saved their savings. And took a vacation to Vegas and if they were very unlucky won a enough money to pay for their vacation on their first visit to a casino. Then went home broke, sometimes bankrupt. There were enough of those people that it left a mark on me. My buddy in high school who worked at a gas station which was on the the way to I-15 to head back to Los Angeles would have sales guys offering to trade him the demo units they had brought to a convention for a tank of gas to get back to the office.
The trick was you had to actually get there, nobody from a casino called you up and started asking you to play games of chance. And all the games are generally playable at home with your own cards or your own dice. So people can get a feel for just how impossible it is to win long term at those games.
No, this isn't about "rich people" and it isn't about "going somewhere to gamble." This is about enabling a class of unscrupulous people a nominally legal framework for stealing from people who can neither afford, nor effectively defend against it.
Because typically banks won't give you loans without ability to pay them back. (sans moral hazards)
This equity purchase is at least equivalent to gambling which is already legal, and yea the latter has bad effects - like alcohol, cigarettes, etc.
Also see: nearly all product marketing that sells you shit you don't need, American culture in general that glorifies "livin' it up" instead of thrift, etc.
If you have a problem with JOBS Act on these grounds - you have a much broader fight, and I hope you're as outspoken about those issues as this one.
And to re-iterate, as this tends to get lost sometimes in examples, my position is that I am for broader participation in the early investing stages of companies, but I am also a fan of a "fence" or a "marker" which mitigates the risk of bad actors pulling in unqualified participants. The "qualified investor" rules are just such a fence.
One more example then. Criminals are a small fraction of a population, but the harm they do is disproportionate. The number of mortgage brokers who were acting fraudulently was a small percentage of the total, and yet the harm they was quite high.
Large, interconnected systems, with humans providing some of the linkages are difficult to manage. And some of the humans are trying to "game" that system all the time. My claim is that the "qualified investor" gate is a mechanism which is a current inhibitor on the games players in terms of potential victims for investment fraud. Loosening the rules, as was done in terms of mortgage qualification in early 2000's, will give these bad actors the pool of victims they need to fund their games. The damage they will do will be disproportionate to any gain we might have achieved by getting a company funded which would have otherwise gone unfunded. I hope I am shown to be wrong in this fear, but it is my current best guess at how this "crowdfunding early investment" change plays out.
There are 1001 ways to destroy yourself financially as a poor person in America and precious few ways to have breakout financial success. If you're a poor person, but an early tech adopter of products like Dropbox, Oculus, and Uber, you could very well be a great investor and lift your entire family out of poverty.
Being poor does not make someone stupid or incapable of making proper life decisions. There are far more poor smart people than rich smart people in the world. Most people never leave their social class, regardless of their intelligence, in large part because most avenues for escape are blocked.
[0] http://www.joshuakennon.com/gt-advanced-technologies-bankrup...
I would not bet on that. There could be loads of startups that work to further 'democratize' this.
How about used car dealers? Should we prevent non accredited investors from buying used cars? After all, a car represents one of the worst investments with no chance of capital appreciation. How about Rent to Own shops? Those prey on the stupidity of poorer people.
Let's support freedom and let adults make their own choices, good or bad. Unless we want to ban Keno, the lottery, pay day loans, penny stocks, and let the government manage everyone's money. Of course given the government's inability to manage their pocketbook, I would suspect that the average American is more intelligent in terms of investment screening than the U.S. government. Remember Solydra?
Freedom means even the freedom to be stupid.
A company can choose not to use that exemption, and instead do things the official, open way: issue securities to the general public accompanied by the required disclosures. That allows the company to take investment from anyone, while also protecting the public by ensuring that that the offering is above-board and accompanied by enough information for the public to make an informed investment decision.
To what extent is a person legally allowed to take advantage of another person's ignorance or bad decisions?
Let's go extreme here. Should there be an age of consent? Yes, because we need to protect children from being taken advantage of because of their ignorance and likelihood of making bad decisions.
Thus we have already determined that, at least in some cases, the government's role IS to protect people from their own ignorance or bad decisions.
>adults should have the freedom to invest in whatever they want
What happens at 18 that means we can protect the child but not the adult? While growing knowledge and wisdom and an increase in brain maturity means we can lessen our protections, there is no justification from going from full protection to no protection on their 18th birthday (or whatever birthday you consider someone to become an adult).
Now, I'll accept that we can't protect them fully and this protectionism must be weighed against freedoms. But this is why a ponzi scheme is illegal while a lottery is not (assuming the lottery follows regulations). There is an issue with regulatory capture that we need to remain vigilant of.
To the extent that the person taking advantage doesn't lie or otherwise deceive to exploit the other's ignorance or bad decisions.
Would this mean that using attractive people in advertising is now banned because the average person is ignorant of how the attractiveness in an advertisement impacts their impression of that advertisement? Those making the add are keenly aware of this and use it to their advantage.
The SEC, just like now. You could argue they aren't as good at it as they should be, but that doesn't really change anything.
There are limits of what you can invest here, as opposed to the normal stock market where there aren't. So at least that's a plus. Nobody will in fact be able to lose their life savings here. Just 10% of it.
This is what happens when you have lots of extra money floating around and traditional investments aren't producing results that can beat inflation.
People have been shoveling large amounts of money into tech for way too long, and even last year WhatsApp was sold for ~20 billion USD.
We've now past that and are now at a point where we're going to pump that bubble up even further.
This is a non-starter and will only be used in special circumstances. Just because you have rules that allow non-accredited investors to invest, most companies do not want investments less than $10-15k on their capable. In effect you exclude most non-accredited investors anyways. The exception of course is for the earliest stage companies, but then they run into another problem: legal fees on a Reg A+ Are going to run you $40k-$70k. Compare that to $2-$5k for legal using a YC/500/TechStars template doc. The cost of admission is to high.
FundersClub and AngelList will also not benefit from this either because the New rules don't extend to fund structures like the 506(c) rules. So even if you could create some reusable template document with exhaustive disclosures you can't use it for these purposes. Jobs Act 2.0 may address this next year, but for now these rules are largely useless in practice.
If the SEC provides a way to pool together smaller investments in a fun structure they would have be able to invest in opportunities like Uber. Probably the safest path (albeit venture investing is very very risky) is when investors get to invest alongside professional VCs because the company will have been better diligences, better capitalized, and there will be management oversight.
People running scams won't worry about all that stuff that separates legitimate from illegitimate. What this does is provide an easier way to appear legitimate to a wider section of the population. $70k in legal fees is just chump change if you can get 1000 $2k investors in two hours over the internet. And maybe get a small time lawyer to do the paperwork in exchange for equity.
Honestly the fact that this still makes it hard for legitimate companies to raise from the public means that the likelihood of the public being exposed to scams is actually higher. It's an either-or thing. Either just open things up, or don't, but going half way is actually more dangerous.
To the companies who are trying to build walls and dig trenches around marketplaces which serve this end, personally I hope they all fail, and we end up with a distributed network which can host the necessary ledgers and market-making functions required.
If anyone here has the legal chops to help build this, please email me ;-) I've done my own 506(b) and I could build the distributed trading engine (did similar work on colored coins) and I would love to open source and democratize a platform for this.
I look at what SolarCity did with SolarBonds, which is a platform built by Common Assets who they acquired (unknown amount), if you've tried that platform, I think you have a taste of how SME companies could sell their equity.
I think the right platform can also significantly reduce the burden of an extremely long-tail cap table.
From a fund / roll-up perspective, the companies host their own trading platform, there's no reason the funds can't buy shares right on there, bundle, and resell the mix to their LPs. Someone like FounderFund benefits by being able to cheaply (as in transaction fees) acquire equity in many company who are running the A+ platform.
I've always believed that tech can be a great equalizer, and this would be a step in the right direction.
A better headline might be "SEC adopts rules for small public offerings."
Does everyone invest? Hell no. Do wealthy people now diversify their portfolios with risky start ups? Yes.
There are vigilant checks every investor has to go through that limits the amount of capital they are allowed to invest which limits the risk for even the littlest of guys.
When you go to invest you are warned, I mean REALLY warned several times that you will probably lose your investment.
This could actually reduce said "bubble" as private investors are not stupid and the valuations you see are very modest.
My final point would be that the fundraising activities are open. The companies are subject to heavy scrutiny through Q&A's and all potential investors can see these conversations occurring.
I personally have chosen not to invest in companies that others are flocking too as their answers to my questions are so theoretical and I know many investors who have felt the same.
Despite Canada, Europe and Japan having efficient functional socialized medicine for at least half a decade, the discussion in the US was about "death panels" and "health welfare queens" and other completely nonexistent issues anywhere else.
There are a lot of other such issues, such as gay marriage, gambling, etc - that I don't find it surprising that crowdfunding is also part of that group of subjects. I only find it sad.
(On the other hand, significant gun-associated violence is practically unheard of outside the US, even in places that have comparable gun density such as Switzerland and Israel, where almost all males have access to guns, and some cities in Canada; So maybe the US actually is a special case)
1. I see that companies using Rega will have to file with the SEC, but does that mean the registering companies will be private or public?
2. If registering companies have to disclose information and it is available on EDGAR, will it be on EDGAR as a reference to a hard copy or will it be available to view online?
3. Is it possible to see a list of companies actively seeking crowdfunding that are currently pursuing Rega exemption? Or is it considered a private offering?
There are more questions, but I think that's a good start to get out of the way for us.
We are a registered broker-dealer with the SEC, which means that we have extremely high compliance requirements for advertising, employee licensing, bad-actor background checks, data security, audits, and more. We try to go the extra mile with our background checks, rejecting founders and investors with backgrounds with any hint of questionable behavior, even if they haven't broken any securities laws. Our regulations require us to share disclosure documents, which describe the risks faced by each company, allowing investors to have a balanced view of each offering.
From what I can tell spending time in Silicon Valley over the years, it appears that some of the discouraging wealth disparity there exists because a select group of employees and investors has had access to equity in great companies, while the rest of the population is shut out. With the SEC's carefully crafted protections in place for non-accredited investors, hopefully more small-time investors will have access to high quality, medium to pre-IPO -sized companies. If such companies are willing to accept many non-accredited investors in Reg A+ offerings, they will need a regulated entity, like a broker-dealer, to help them.
In any case, I'd be grateful to hear your feedback. You can reach me at crosland at seedequity dot com.
Some historical perspective on the history of what I like to think of as the "Cookie Licker Laws" [a].
A middle-of-the-road option for both investors and entrepreneurs in this space has been desperately needed for quite some time. The path from modest wealth to the truly lucrative risk-reward based ROI that comes from being to invest intelligently in emerging ideas and trends ... this path has been littered with roadblocks and land mines for way too long.
On the investor side ... a ~couple years ago I remember being pretty upset that Lending Club didn't publish their "investor income / net worth requirements" straightaway transparently their site. Rather, they first send investigators on the wild goose chase through their idiotic application process.
As far as the entrepreneur side goes: YC has become a less and less attractive option for companies that might not (at least not obviously) quite make it to the $10B potential breakout point that they're looking for: I always tell my partners that our job is to fund all the companies we can that can be worth $10 billion or more. That’s such a difficult constraint we can’t have any other constraints. [b]
Not every business idea should have to be that "big" to be given a fair shot at the route from small-time garage venture to IPO.
[a] http://ink.hackeress.com/2013/09/what-title-ii-of-jobs-act-m... [b] http://blogs.wsj.com/digits/2015/03/25/sam-altman-why-hardwa...
> A limitation on the amount of securities non-accredited investors can purchase in a Tier 2 offering of no more than 10 percent of the greater of the investor’s annual income or net worth.
Do these modest limitations on non-accredited investors only apply to Tier 2 offerings? I.e., can a non-accredited investor put 100% of net worth into a Tier 1 offering?
Also, I saw a SeedInvest summary article on the proposed rules and it stated: "Anyone can invest: Not limited to just “accredited investors” – your friends and family can invest. Tier 2 investors will, however, be subject to investment limits described below."[1]
A law firm called Morrison Foerster also has a nice summary table on page 9 of their Regulation A+ client alert[2].
[1] http://www.seedinvest.com/blog/regulation-a-equity-crowdfund...
[2] http://www.mofo.com/~/media/Files/ClientAlert/2015/03/150326...
It may not be good for people who are unknowingly bad at evaluating companies. Seed stage investment is extremely risky for the common investor.
I think this would contain the risk.
Well, if "crowdinvesting" is a success , as I think it will be ,they may pivot
It makes more sense to invest in a business than just handing out free money with no oversight , the later is what Kickstarter is. I would even say the former is less risky.
Because personally I always thought kickstarter should have been a platform for micro-investment rather than (effectively) a pre-order shop that sometimes lets people down.
In order to compete, these platforms will promise a "money fast scheme" promising to turn $50 into $50k. The main issue is that 1000x unicorns would rather do it the other way and most available startups would be somewhat inferior in terms of investment.
While it's good to have this provision, it doesn't change a lot of the landscape of investors.
Any thoughts on why they included Canada?
I've not used it yet myself, but I find the idea compelling because it allows people to actually invest in companies that need funding, rather than just pre-order.
It seems to support loans with a set interest rate or actual micro-equity. I might actually get around to investing through it someday...
I see no reason why there needs to be a count of how much karma one has collected. I like being able to see upvote and downvote counts for individual comments and posts, but I need not know how much I've accumulated, and I'll say that I think it's detrimental to any given online community.
What the SEC has been doing has been figuring out rules for how this law will be implemented. NOT allowing equity crowdfunding was never an option.
Here is the SEC headline: "SEC Adopts Rules to Facilitate Smaller Companies’ Access to Capital"
That is accurate.
Here is the fourth sentence of the press release:
"The rules are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act. "
It's really embarrassing this has been up on Hacker News so long and not fixed (or commented on? wow).
Without the SEC rules crowdfunding is in stasis. With rules things can move forward. I don't think anyone thinks the SEC is affecting the existence of crowdfunding beyond that.
Accuracy of language is important but so is context.
"With rules things can move forward. "
The SEC is legally REQUIRED to issue rules.