How much does this really change the game for any company that long-term thinks it may take VC money? Doesn't stuff like this crud up cap tables and drastically increase the legal cost of obtaining the protections VCs typically demand? Won't the best prospects among startups avoid crowdfunding, creating an adverse selection problem among available companies to fund through it?
Yes, it seems like "crowd money" is another form of dumb money, which many people say entrepreneurs shouldn't bother taking. Crowdfunding really plays to the "misunderstood genius who the angel establishment refused to fund" story.
Of course, we're all probably thinking about silicon valley style startups. It's possible that crowdfunding will be used for lifestyle businesses as well (not that that's a good idea either).
I think the "dumb money" meme deserves some suppression too. Also, after a few seconds more thought: one reason current low-net-worth investors are a problem with VCs is that they're unaccredited, and unaccredited investors incur liability for companies (as I understand it they can more or less claim at any moment to have been ripped off by the company).
That's not a problem you have if the investments are explicitly aboveboard.
Yes and no. The thing is that Crowdfunding investors are not counted among your investor limits. The trick is structuring the terms in a way that you can restrict voting rights and enact forced buybacks, etc. on your crowdfunded investors to clean up that capital structure as you move forward with another series of investment.
Friends and family money doesn't seem to interfere with VC activity too much - this is just conditionally broadening the definition of friends and family.
“For investors with an income of less than $100,000, investments will be capped at the greater of $2,000 or 5% of income. For investors within an income of more than $100,000, investments will be capped at 10% up to $100,000.”
Is the cap per investment or per person? E.g., if I make 100k, does that mean I can invest 5k total, or no more than 5k in any one company?
Also, is this an annual cap? What happens if I invest in January and the investment appreciates (or depreciates)? Does my cap move with MtM, or just record the cost?
Finally, isn't the "10% up to 100k" part redundant, since someone who is earning 1 million is an accredited investor by the traditional definition? Or is the 100k similar to the 2k, in that it's one part of a greater of function?
(B) the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, does not exceed--
`(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and
(ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;
EDIT- Wait, what if say your income is $150k but your net worth is only $80k? Section one says it applies if either net worth or income is less than $100k, but section two says it applies if either is greater than $100k. Hmmm.
There are lots of people who don't have income, but have lots of net worth - they aren't worried about the reverse case. If your net worth is more than $100K, or make $100K, then you are in (ii).
You are still allowed only 10% though to invest (in total). So, if you have a net worth of $1M, you'd be capped at $100K invested per year.
We're actually working on a crowdfunding site that's been waiting on this law to pass to begin operating. That cap is an annual cap for individuals. Companies are limited to 1 million dollars of crowdfunding per year. I know there was a proposed 2 million dollar cap on how much a company can raise in a year if they had audited financials, but I'm not sure if that made it into the final cut.
If permitted by the law if and when it does pass, I would start a portal that co-invests in EVERY startup that is presented for crowdfunding through the portal. As an investor there is no better indication of legitimacy than when the sponsor has money in the deal. Then if and when your portfolio companies have success you have a real track record to build on and grow your portal.
Do they want to protect unsophisticated investors from being tricked? It seems like it's a really positive movement in support of small, innovative businesses.
Yes; it rolls back investor protections. To understand the concern (you don't have to agree with it to understand it), stop assuming that all or even most of the people who take advantage of Crowdfunding will be businesses run in good faith, or that there will be any effective way to impute reputations to all, most, or even any of the people offering equity on these sites.
To be fair people said the same thing about ebay. Any sort of quality crowdfunding site will be able to prevent fraud through a mix of identity verification and leveraging their users expertise to weigh in on a businesses viability. (At least that's the model we're using)
I think you and I both know that there is no shortcut way to evaluating the viability of a startup company.
EITHER you will put them through a Y-combinator-like interview and evaluation process, with sophisticated evaluators and a lot of man-hours spent per company, OR you aren't doing shit to evaluate them and you're going to be hosting scammers left and right. There is no shortcut.
You crowdsource the viability and the platform makes sure they're a real company and verifies their legal status. Who better decide whether or not a company has a viable idea than their potential customers or users? In fact, I can't think of a better way to assess the viability of a company than to put it out there in front of 1000's of eyes to see.
The truth is that the Y-Combinator evaluation style, or other more tradition financing routes for that matter, aren't the end all be all. We're working our tails off to leverage our users knowledge and make a system that roots out any sort of scammers.Crowdsourcing isn't a short cut, it's just a decentralized system versus our current more centralized one. In fact, I suspect more man hours will be put into assessing viability through a crowdsourced model just because of the sheer number of people.
First 20 crowdsourcers, all paid by company: "These guys are totally legit! I visited their offices! Saw a hamster that was totally cancer-free!"
Next 500 crowdsourcers, not paid by company: "Looks legit! Take our money, please!"
Company founders: {fly to Switzerland in their ROFLcopter, having committed no crime whatsoever}
1000 or 100,000 or 100,000,000 eyes looking at a subject shallowly are not a replacement for one set of eyes looking at a subject deeply. The great thing is, the marks won't even realize they've been scammed for years or perhaps ever, due to the long delay between providing money and expecting results.
it does make sense that the role of policing will have to be done on the portal owner's end. Brand Reputation, Success, etc. People were skeptical of Kickstarter at first but look at how it has flourished.
Will this make Kickstarter illegal in any way? I mean are people still free to give money (capped of course) without having to receive stock in return?
I'm actually working on a crowdfunding for equity site that we're going to be launching here in the next couple of weeks. I had the opportunity to read the bill and it stipulates that those of us acting as crowdfunding intermediaries be either broker dealers or this new class of financial institution called a "funding portal"
From here on this is pure speculation. Basically, the gist that I've gotten from the various SEC officials making comments on the bill is that a funding portal is going to a be very loosely regulated compared to other financial intermediaries. Mostly funding portals will exist as a way for the SEC to keep tabs on us to prevent fraud, and to make sure we're meeting all our various reporting requirements to the Federal and State level governments. Again, all of this is speculation based off of the various committee hearings, and comments from SEC higher ups regarding the crowdfunding bill.
Edit: I also should have included that the SEC is using "funding portal" as a way of limiting the scope of our activities. It prevents us from doing things like actually performing the money management functions etc.
This sounds like an excellent - and legal! - way to fleece the public with fake startup companies.
If you have a legit company, you better get in now, because it won't be long before a wave of scammers is busy promoting their new "give us $2,000 and MAKE MONEY FAST! Approved by Congress!" schemes.
Those of you who have flexible ethics should consider it yourselves. For a couple thousand dollars you can easily work up a website and suitable promotional materials, form a corporation and so on, and then you just wait for the money to roll in. Cure for cancer! Spaceship to Mars! Cold Fusion! Doesn't really matter, just make sure you emphasize that the investment may not pay off. If you can keep it going for a while it should provide an excellent source of income for a couple of years, before you regretfully announce bankruptcy.
That is a bit dramatic. I don't see how this opens people up to any additional scams than are already out there. What it does is provide another avenue to get money from people who have it into the hands of the people who need it.
Yep, that will be exactly the angle to push. You too can get rich just like venture capitalists, with as little as $2,000 down!
It will just be a sad, unhappy coincidence that none of their investments ever pay off. Oh, too bad, you just got unlucky. But if you put another $2,000 into my next company, we're definitely going to make you rich, rich, RICH!
From what I understand, people that raise a significant amount of money via kickstarter/crowdsource usually do so from their own, already established communities. If these people are in it for a quick buck, its likely they wont have the community necessary to raise any significant amount of money.
Or you know, it could open up new funding options for startups and small businesses. The truth is that a well built crowdfunding site can prevent fraud pretty easily.
