SEC Greenlights One Style Of Equity Crowdfunding For Startups

Right. It can be dangerous if reckless crowdinvesting platforms become prominent. There are already shady platforms out there today, but there are a few forces and barriers to entry that I hope will shape the space into a healthy one:

There's a lot of regulation around being a platform where folks exchange securities (e.g. equity and debt). Someone can't, for example, whip together a website with Stripe over the weekend. The SEC takes this pretty seriously, and because of all the money transfer regulations, it's very hard to move large amounts of money around without playing by the rules. (Heh, I wonder how long before someone tries a bitcoin-based crowdinvesting site. [Don't try this at home!]) This should help limit most of the potentially shady and dangerous platforms.

I think this will also be a space where a few established brands dominate the space, and strong brands and networks will draw strong startups. Without good deal flow, it's going to be real hard to break into the space. Even if you allow anyone to create company profiles and raise money, you still need to draw in investors. I'm sure some people will be suckered in, but I'm skeptical this sort of site will become large enough to create systemic problems. (/knocks on wood)

But that doesn't mean a platform can't establish itself and branch out to allow "wild west" crowdinvesting. Wefunder has plans to expand who can raise money, but we care a ton about doing it responsibly and safely and it'll look somewhat different than what we have today. I won't go into much detail here because some things aren't public yet, and I'm sure every other platform has it's own thoughts and plans about "going mainstream".

Over the next few years I believe people will become more mature about crowd funding thanks to Kickstarter, and I think the skepticism about crowdinvesting and memories from the startup bubble(s?) will be a negative force against too much hype. But there is a danger around a crowdinvested company becoming "the next Facebook" and everyone going bananas about investing in more. There's no sure-fire protection against that. We do our best to educate folks about ways to approach startup investing and the risks involved, and hopefully other platforms will do the same.

I think there'll at least be a lot of visibility into crowdinvesting as a whole. So if things start to get fishy people will talk about it, and the more it's talked about the more folks will (hopefully) be cautious. (Maybe what we need is a crowdsourced SEC to help protect investors ;))

And finally, I think the space will evolve past "Kickstarter with an Invest Button" and the crowd will get better at doing diligence. There will be cases of things getting lots of funding that shouldn't, but that'll happen every now and again.

But who really knows, these are just my personal thoughts and speculations. I'm an optimist and want to believe in a happy crowdinvesting future. :)

I do understand how it works. It's the standard fund arrangement, except that you are dealing with very high risk (junk level of risk) securities. These are still born businesses with no market or valuation based in assets/profits. Hence my lottery ticket comparison. However, you do reduce risk a little by spreading the risk. But the fund is also a startup. Meaning that people who give you their money have a bigger chance of losing because your stability and the security of the funds are directly tied. If you go down in two years any long term investment potenti is lost. Given that on average a startup takes about two years to develop to a profitable level (no ramen), your finacial unstability (because you are a startup) does diminish the chances of this working out.

Of course, I want this to work out and would love to eat crow. But it is a very risky strategy to take. Though give how Cherry got 5 million to wash cars, I can't see how this wont manage to make billions (which is the aim of YC).

This is a win, but it's still a bit disappointing. The SEC has been directed by law to come up with rules to allow the crowd funding provisions of the JOBS act to come into force and they've blown past the deadline and been dragging their feet. I think there are a lot of people in high positions there who just want to see the whole thing go away.

Each FundersClub fund is its own independent LLC entity, which is basically the point of the article describing why the SEC is green lighting the process.

If FundersClub does go down, each fund's LLC survives, with it's investors owning their fractional claim on the funds' assets.

Similarly to buying stock in a company using ScotTrade or equivalent. If ScotTrade goes down, you still own the equity you purchased and which they were holding as your custodian.