For the most part, only rich people can hand their cash over to venture capitalists and private equity groups to invest in young firms. That means small-time investors have no way of investing in most of the new, fast-growing startups, according to the authors.
Seems like authors aren't considering ICOs as a new form of IPOs for startups. Any computer and finance literate person can invest, not only small American residents. Volatility is higher in ICOs and there are practically no regulations, so investors should be more careful. Nonetheless, the underlying basic concepts are the same
It would make life complicated for a startup to have a lot of small shareholders. Especially if they weren't accredited investors by the legal definition.
This subthread was about class barriers and investors. You expressed ICOs might not be harmful to them, so I mentioned a way they might be. Not sure where the financial sector topic came from.
What exactly would the problem be with letting people crowdfund startups (i.e. equity)? Why not follow Filecoin's lead? I've been reading your arguments and you haven't really articulated your concerns; just persuasive cases that the status quo should be maintained.
The next Google/FB/Netflix might very well start using the model here, if you let it. But only if they have access to capital. And right now, that means VCs.
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.
I think it's important to recognize that the Public can't easily invest into startups. It really is just a small group of investors who are in this market right now. This is an important difference between today and the late 90s.
In my opinion it would be a serious mistake to ease the current restrictions for investors; indeed, it might be even smart to raise the bar a bit instead. Money is a sensitive matter, and allowing everyone to invest in startups will only have negative effects for everyone involved.
For one, this is laying the ground for a new bubble. Startups are inherently risky, and you'll end up with a lot of small investors blowing up their savings on the gold rush of overblown valuations.
Second, one of the greatest effects of current rules is that most of the funds available to startups are the "smart money", i.e. they come with experienced investors (VCs and angels) who add quite a lot of value besides the cash itself. Small-time investors mostly don't have that added value; not only that, but by definition their capital will be sought after by inexperienced founders, who are more likely to fail without proper guidance (as more experienced ones supposedly have more contacts and mentors available).
And third, even though there is a lot more money available today, there is still some kind of filtering process before the startups are funded. Hell, even Yuri Milner doesn't throw his money blindly to anyone who knocks on his door -- he had relegated the process to the Y Combinator team, so there still is some selection.
In short, the day this new regulations pass may be marked as the start of the new startup bubble. Mark my words.
If the customer would receive shares of the company in exchange for their money, that’s just investing.
There are public platforms for crowd investing of startups, but they require users to be accredited investors due to regulations.
That’s not the real issue, though. The real issue is that good startup teams don’t have any problem raising normal investment capital right now. The only companies who would even want to raise money from the public would be those who couldn’t get normal investment, which are almost exclusively bottom of the barrel companies that have been passed on by many professional investors. For many reasons, not just regulatory, you don’t really want to have thousands or tens of thousands of tiny investors to manage for your startup.
Companies tried to skirt regulations with the ICO craze a few years ago. It was almost universally a complete disaster for investors. A lot of ICO companies got extremely wealthy and a lot of investors discovered that without the regulations and share ownership they don’t really have much of anything.
Investing in startups is hard, as I am sure Y-Combinator would attest. The layperson is not prepared to invest in them. To vet the companies, their leadership, the feasibility of their ideas, etc... Especially with a low payout. I can understand the SEC's hesitation as this could easily lead to scams. Just look at kickstarter and all the things that have gone down there.
Really what the parent is proposing is something like -
Here is a savings account. You can throw chunks of money in it at startups that have a high chance of failing. But if they succeed you'll only earn bank level interest since it's not capital investment. So you have a small chance at earning bank level interest.
Aren’t ICOs covered under Reg CF of the JOBS Act though? That was the whole point of the JOBS act: to provide access to capital that an entrepreneur normally wouldn’t be able to obtain.
An ICO is not a bad alternative to pre-seed funding.
There’s a lot of auction theory that comes into play that an individual investor is unlikely to know and I would imagine a startup may not fully comprehend either. I would worry that this is still not a level playing field.
The legal complexity of all the equity structures possible seems way too daunting anyway.
Passionate young programmers who want to work for a startup don't have the background to understand it, even if the raw information is given when signing up.
Plus, you have no idea what the next round of funding will do to the equity structure...
Isn't it time for regulation to limit this complexity?
This is a big problem. There are fewer promising, early-stage investments available to retail investors than ever. More and more, private VC money captures all the value created by promising upstarts. Buying $1000 Microsoft stock in 1986, you'd have seen a more than 1000x return in that amount of time. Today, tech giants like Facebook IPO at $100B market cap, leaving very little room for big returns.
This is in part because private VC funding has matured...but also because there's all sorts of regulations about raising money that completely exclude non-accredited investors from early-stage investments.
Crowdfunding can potentially be a deal-breaker for startups trying to raise a later stage of funding -- at least as it stands right now.
I've heard from many Series A / B VCs that they will not invest in startups that have gone the equity-based crowdfunding route (that is, not the Kickstarter approach, but the new kind where equity is provided as per the new JOBS act), because they don't want to deal with hundreds of tiny investors. It's a nightmare for them.
The only way to deal with these sorts of equity-based crowdfunding platforms if you plan to go for a later stage equity investment from a VC or other investment professional is to bundle all the unaccredited / crowdfunding investors into a single LLC or other entity and have that entity invest in the startup with terms that allow future investors to treat them all as a single class in much the same way they deal with accredited angel investors now.
Unqualified Americans can invest in some startups since the Jobs Act under Obama, but for various reasons it hasn't been very popular. Startups are hesitant to use it because they're afraid of being blackballed by VCs... or at least that's the FUD.
It seems entirely unreasonable to manage a bunch of "tiny" investments. It just sounds like a legal nightmare.
I think you'd have to pool all of the tiny investments into one large investment, and then that investment would have to have one person (or a small few) handle all interactions between the investment block and the startup. You'd essentially be creating a fund, in which investors of the fund would have a wall between their investment and the funds ultimate investment.
Even with all that, it seems like a very easy way for a person to lose their money. Startups are very risky investments and the people who succeed at investing are the ones who have developed a strategy for picking winners. Even if smart people decide that their strategy will be piggybacking off of more experienced investors' decisions, the market would still be ripe for drawing in lots of suckers to make really stupid investment decisions, though there are already lots of currently legal alternatives for that.
Financial literacy is already bad enough in this country, does it make sense to make learning it even harder?
Public stocks and the like are heavily regulated. If we let random people invest in startups, a bunch of people would get scammed out of their money, then there would be calls for more regulation to protect investors, which would only serve to hurt startups. Meanwhile, none of those little investors would make any money because the median startup is a bad investment (vs the median public company, which is an ok investment). Nearly all of the startup returns come from a small number of outliers, and those outliers will most likely continue getting funding from larger investors.
One of your key premises, that investing in startups is a key / good path to getting rich, is flawed. Investing in startups is notoriously NOT that stable of an investment vehicle. If you're a small-scale enough investor to not meet accreditation rules, why would you WANT to throw 10k at a startup?
You speak in terms of rights and that's one debate to have. But evaluating the material harm in this situation, the notion that this denies upward economic mobility in a significant way seems overstated.
Small businesses are a huge target of investments. As for stocks, micro-caps have historically outperformed large-caps, and micro-caps individually are limited in how much investment capital they can efficiently utilize.
>Also someone with $50 million can still invest into an ice cream stand but someone with $50k cannot be an early investor into a tech company.
That is mostly due to regulatory restrictions on public offerings, and yes, that contributes to greater income inequality.
In a free market however, you'd see low-friction token sales, with thousands of contributors, providing the tech company with its initial capital, not a small cadre of VCs.
Seems like authors aren't considering ICOs as a new form of IPOs for startups. Any computer and finance literate person can invest, not only small American residents. Volatility is higher in ICOs and there are practically no regulations, so investors should be more careful. Nonetheless, the underlying basic concepts are the same
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