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.
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.
Everyone here seems to reject the argument outright. I agree we need crowdsourcing, but it needs to be done right.
Crowdfunding was once legal, this led to all sorts of scams and lots of elderly losing their retirements.
This is what led to the current SEC requirements of 1+M net worth accreditation and the 499 max investors cap.
It's definitely possible to do, BUT IT IS HARD. Here are some ways YOU as the entrepreneur could be in trouble:
* Think of the nightmare of having 1000+ investors in your startup.
* Every unhappy investor is a potential liability. Now think of one of those investors loving your idea, pouring his life savings (Say 200K) then filing a suit in case the startup fails.
* Investing is not a simple "here's $20,000K give me whatever that's worth in stock". The shares can be voting/nonvoting, privileged non/privileged etc. Will there be protection attached?
* Your horrible idea could be funded. Think of startup ideas your uncle Vinny gives you, now imagine him investing in them. Smart investors shred bad ideas in minutes.
Completely public crowd-investment in startups is a bad idea. Crowdfunding is (mostly) great, but people invest money expecting a return, and startups do not generate returns the way the stock market does. Crowdfunding as a public investment vehicle is going to hurt a lot of people.
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.
I wonder if one of the main reasons it hasn't been decentralized is because it has been illegal to do so—selling shares/securities to the general public without disclosure of risks and other rules set forth by the SEC.
I remember being in the Bay Area back in 2014-16 and people talking about wanting to use Kickstarter and other crowdfunding platforms for not just buying products but owning the company, but kept getting stuck at the accredited investor requirements for private companies.
So, I guess I'm curious about this as a referendum on why we have securities laws and accredited investor laws and whether those should change or stay, I just don't think it's necessarily as brand new of an idea as it seems.
EDIT: The concept I was talking about is called equity crowdfunding [0] and the SEC opened it up to more people in 2012 [1].
The SEC is still reviewing the crowd funding portion before anyone can utilize it. Crowdfunding equity in startups has major governance problems that will be very difficult to solve.
I'm genuinely confused how people think it is a good idea to open up a class of investment with no controls. Why not just buy stocks where the companies have transparency and solid corporate governance?
Yes, I wondered about that too but I'm not sure about the legal issues involved. Though once they allow regular people to invest in startups, founders can sell some equity and use the money to invest in a pool of startups.
I wish the crowdfunding platforms well but, in the end, there is an inherent tension between the core idea of crowdfunding and the idea of investor protections under the securities laws.
U.S. securities law give two broad choices to issuers trying to raise money: take your company public or do a private placement. With the former, you can deal freely with all sorts of investors, in any number and with whatever background. With the latter, you deal with sharp restrictions on the number of investors you can deal with (if unaccredited) and on the qualifications of investors for investment in such offerings (accredited, unaccredited, etc.).
Conceptually, crowdfunding tries to straddle these two worlds when it offers true equity (as opposed to promotional giveaways only) in the ventures. It seeks to broaden the number and type of investors who can invest in a startup venture while simultaneously trying to protect prospective investors from dishonest or otherwise improper offerings.
Problem is: the larger the number of investors and the more latitudinarian the standards for who qualifies, the more it looks like an unregulated public offering and the more it becomes susceptible to all the problems that brought public offerings under strict regulation in the first place.
So today we have a hybrid that theoretically tries to open up startup investment to all sorts of small investors but that practically attempts to keep a whole variety of restrictions in place to ensure investor protection. This hybrid is what is failing to gain popular appeal. There are too many restrictions needed to ensure investor protection to make it a fluid vehicle for small investors to invest and to make it attractive for startups to use it as a means of doing their funding.
Thus, the technology is there today to facilitate a robust crowdfunding marketplace but the law is not there for traditional reasons of investor protection. And so the current efforts sputter along akin to how an otherwise intriguing startup might seem to have almost unlimited potential but never quite seems to gain traction.
It took five years to get the regs in place to support the statute that put this funding mechanism in place. That is slow because the issues (in my view) are intractable. Will another five years make a substantial difference. In my view, no.
But who knows? My free market side says do away with the investor protections and let it rip. But the lawyer in me says, no way - such a free-for-all will likely cause many to be duped and few to prosper. It is not an easy choice and that is why I think this will ultimately remain sputtering along with highly uncertain prospects of effecting true change in the investment landscape.
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.
The regulations protecting investors are far stronger than those protecting consumers. Crowdfunding could not exist if the customers were legally considered investors.
The problem is supply side. Crowdfunded companies are giving the platform 5-10% of the capital raised. Why crowdfund and have a whole bunch of investors on your captable and give up some of that money AND deal with the compliance cost of you're strong enough to get it from angels/seed VCs. Current regulations force a broken model.
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.
This would be really hard to enforce. A big company could just invest in a startup, and have that startup spend money to earn market share while not being profitable.
Do you know how much of a nightmare it would be for a small startup to deal with thousands of effectively anonymous investors, each of whom has only invested a few tens or hundreds of dollars? You have to deal with voting rights, transfer of equity, shareholder lawsuits, etc, of people who you have no previous contact with and no way to vet. What's to stop a competitor from "investing" in your company to gain access to your financials? It just doesn't seem like the risks and costs are worth the reward.
The accredited investor rules irk me. Not because investing in startups is a good way to accumulate wealth, but because of the double standard. The government happily separates literally tens of billions of dollars from poor people every year through the lottery, why can't we let those people crowdfund interesting new ideas if they want to?
This is great news - raising capital for a new venture has traditionally been controlled by restrictive regulations. While the regulations were likely originally designed to protect investors from getting scammed, they also end up making it much more difficult for legitimate ventures to raise that first round of seed capital. The best part about this is the crowd-sourced angle... huge potential for disruption here!
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.
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