Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
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Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#2Excerpt:
The SEC, responsible for creating the rules designed to fulfill Congress’s mandate in Title III of the JOBS Act, included rules—known collectively as the 12g rule—that are a powerful disincentive for high-growth startups to use what the SEC calls “regulated crowdfunding.”
These rules stipulate that any company that takes on more than 500 individual investors or grows to a size greater than $25 million in assets must start filing regular disclosures just like a publicly traded company. It is all the pain of an IPO without the benefits of the IPO."
Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#3Excerpt: The SEC, responsible for creating the rules designed to fulfill Congress’s mandate in Title III of the JOBS Act, included rules—known collectively as the 12g rule—that are a powerful disincentive for high-growth startups to use what the SEC calls “regulated crowdfunding.” These rules stipulate that any company that takes on more than 500 individual investors or grows to a size greater than $25 million in ass…
It is almost as though the SEC does not want anyone to use crowdfunding other than scammers.
Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#4Excerpt: The SEC, responsible for creating the rules designed to fulfill Congress’s mandate in Title III of the JOBS Act, included rules—known collectively as the 12g rule—that are a powerful disincentive for high-growth startups to use what the SEC calls “regulated crowdfunding.” These rules stipulate that any company that takes on more than 500 individual investors or grows to a size greater than $25 million in ass…
It is almost as though the SEC does not want anyone to use crowdfunding other than scammers.
Alternately the SEC just recognizes that "crowdfunding" a corporation is just exactly what IPOs were supposed to be for and doesn't feel super happy about having to write the loop holes to their own regulations.
Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#5Earlier quoted context omitted.
It is almost as though the SEC does not want anyone to use crowdfunding other than scammers.
Alternately the SEC just recognizes that "crowdfunding" a corporation is just exactly what IPOs were supposed to be for and doesn't feel super happy about having to write the loop holes to their own regulations.
Exactly. No regulator has ever actively worked towards putting themselves out business. If crowdfunding were to succeed then people might start to consider why we have all this regulation, on the other hand if the SEC structures the rules such that only scammers make use of it then they can say "we tried this and it was a disaster so it is time to bring in more regulation".
Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#6I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio of 10 will succeed.
That, and a few other arguments, here as well: https://news.ycombinator.com/item?id=10481136
Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#7I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio…
Couldn't an equity crowdfunding investor spread their money around hundreds of companies as well, making smaller sub 1000 dollar bets. Or is there a minimum investment amount for this?
The main reason I'm skeptical of this approach is that I think the most promising companies won't do it, so the pool of companies doing equity crowdfunding will be low quality
Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#8Pension funds and mutual funds are some of the largest crowd funded entities on the planet. The former lacks transparency and has too many middlemen, and the later is far more limited in it mandate and typically is restricted to public markets.
If congress wants to bring small non-accredited investors into the private markets and increase access to capital for small companies, there needs to be mechanisms in place to do it as a pool vehicle that invests in one or more underlying companies managed by a platform because companies don't want to disclose IP, not deal with a lot of small investors.
Moreover, the regulatory, compliance, and accounting overhead single investor needs to be very low (sub $100). Any broker-dealer model will carry a significant tax unless the SEC/FINRA lighten the regulatory burden for broker-dealers (which is very high).
Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#9I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio…
I haven't looked too much into this space, but what about this rationale: the existing model pushes startups into 1000x-or-bust behavior, which contributes to the low success rate, which reinforces the need for high-risk growth followed by a spectacular cash-out. This could be driven by many factors, not least of which is the "brand name VC" model in which venture funds need a couple household name home runs to attract the best deals.
Perhaps the "crowd" model would allow the creation of smaller, lower-growth companies that could dominate a niche or region, and generate long-term dividend returns for investors rather than immediate capital gains. It could fill the space between debt and growth equity for companies that have ambitions beyond the lifestyle small business, but no potential to be breakout hits. Is there already a name for this kind of funding?
Re: Tech Startup Crowdfunding Isn’t All It’s Cracked Up to Be
#10I haven't heard a rationale for equity crowdfunding that makes sense to me. It sounds straightforwardly dangerous. The whole thesis for startup investing is that investors build large portfolios where the winners pay for the losers. A 2x return is a out-of-the-park home run for a retail investment in a public company, but is, mathematically, a failure for a startup investor, because only 1-2 companies in a portfolio…
It's certainly more dangerous than investing in IBM or Chipotle, but not obviously more dangerous than a number of things which we let adults purchase, including casino chips, time share properties, houses in California (which we'll subsidize your 5X leverage on), art history degrees (where capping it at 5X leverage would be refreshingly conservative), etc etc.
A $3,000 computer purchased today will depreciate to zero in 3~4 years, leaving you with hopefully some happy memories and a paperweight. Three $1k crowdfunding investments may do likewise. Do we distinguish them because they don't guarantee the paperweight?
I get the social purpose of e.g. preventing boiler room operations from extracting "investments" by retirees into businesses which are not actual businesses, but for businesses which are actual businesses which just happen to have 90% failure rates, "Distribute the risk among a group of people guaranteed to be at least middle class; and cap it at a figure lower than what they could reasonably spend on e.g. a wedding dress" seems to capture most of the social benefits of outlawing outright scams while also not outlawing middle class people from owning startup shares other than those they receive as compensation for services rendered.