9 ms·

People have the right to make poor investments.

ChuckMcM 10y ago
So is the flip side true? Do I have the right to clean out your parents bank account and get them to get a second mortgage on their house and give it to me, and then tell them, "Oh wait, it wasn't free energy after all, it was something else. Well, fail fast that's my motto. See ya!"
- Moshe_Silnorin 10y ago
  That's fraud not crowdfunding. If it's a sincere attempt to start a business, crowdfunding seems like a fine idea. Though I agree, it is a lemon market and I wouldn't participate myself. Many people will lose money doing this, but the cost of freedom is some people will make poor investments.
  - tptacek 10y ago
    If it's practically impossible for the median consumer investor to tell the difference between a fraud and a legitimate crowdfunding opportunity, of what use is it for us to rhetorically isolate the frauds from our discussion?
    - maverick_iceman 10y ago
      The point is not whether the investor can tell the difference between fraud and poor investment. It is rather whether an actual fraud was committed as determined by a court of law. Investors should do their due diligence anyway.
      - tptacek 10y ago
        But that's not how publicly traded companies work. In practice, it's difficult to go public without substantial revenue, and your numbers have to be audited and disclosed through SEC-approved processes. Combined, these two factors have the effect of keeping most outright scams out of the major markets. Equity crowdfunding eliminates both of those guardrails. So it's reasonable to ask how effective they'll be (at generating returns for retail investors) given the obvious issue of fraud (and incompetence).
  - ChuckMcM 10y ago
    And this is exactly the ugly place where reality collides with the way we wish things were. I worked for a guy once who could put together a story so plausible that someone close to you would invest way more than they had any reason to or should, into the venture. He would not tell a single outright lie and the "truth" would be that if all the things that needed to happen, did happen, the business would in fact be a great investment. He would have a sold your parents so hard that they are probably getting their friends to come in on the deal too. And when all the money was gone and your parents were destitute, he would have an iron clad story about how it was not his fault, how your parents knew that things could go wrong, and that risk was all part of the equation. He would be untouchable as far as a fraud prosecution goes. Remember the 'startup story' we read here? [1] This CEO convinced his employees to cover payroll, you don't think he couldn't convince your mom? I hope you (or someone you care about) never experiences a really good con artist first hand because it completely shakes your belief in humanity to the core. These people will take everything you have if you let them, and they will do it without hesitation. This is how it goes; Your family member or friend calls you to tell you that they just got in on a really good deal. They are going to be rich and you can be too. They will tell you how this company their new friend is the owner/CEO/president of has discovered some new product/bitcoin/algorithm/process/material that is going to disrupt some multi-billion or multi-trillion dollar a year industry. They will have some really great story about either how the information was suppressed or some "unknown genius" that they befriended/are/know came at it from a completely new direction and the world was going to change overnight. They just need some money to get their first prototype demonstrable and bam the value of your investment will grow by 100x easy. Now you ask them about it and find a lot of things that you find suspicious so you ask them to ask questions. If the questions are too pointed the prankster will threaten them with not taking their money (and so losing out on this huge reward) and if they have bought the story they will shut up. The trick here is they think they are already rich because they are convinced it is such a sure thing. And no amount of reasoning from you will change their mind. When it finally is revealed that the money is gone and the "company" is shutting down, there will be a set of things that happened that appeared to be either extremely unlikely or extremely rare. In one story the "technical cofounder" who had all the secret sauce in their head was killed in a freak car accident in Russia while visiting their family to bring them back to the US. The crowd funding site will be set up with layer after layer of warnings that you can lose all your money, and there won't be a single shred of printed information that could prove that the people responsible didn't believe what they were saying when they convinced your loved ones to invest. Bottom line, you won't be able to prove fraud, people you care about may have had their entire life's savings taken and are now living in poverty on government benefits, and there will be nothing you can do about it. The only things that stands between these fraudsters and your grandmother are the Qualified Investor rules. [1] https://medium.com/startup-grind/i-got-scammed-by-a-silicon-valley-startup-574ced8acdff#.s6q01akcm https://medium.com/startup-grind/i-got-scammed-by-a-silicon-...
- sdfuu779 10y ago
  Feel a bit of hay fever coming on. Depends on what you mean by "Do I have the right to clean out your parents bank account and get them to get a second mortgage on their house..." If they decide to invest in something and have to do those things to get cash and it goes bad, oops on them. If you commit fraud and get access to their financials and clean them out, oops on you. We give a lot of leeway for people to solicit support of new inventions and ideas. There also happens to be a lot of pyramid schemes and similar get rich quick scams. I don't have a fool proof way for seeing a scam from a score. If a kickstarter has specific data, date targets, shows they've done some work and made connections, I am more inclined to have a go. If someone is saying "Get your friends to sell tupperware, you'll be rich in no time!" with little detail otherwise, I'll laugh and say no thanks.
  - tptacek 10y ago
    We actually have not, for the last 80 years or so, given a lot of leeway for people to solicit support of new inventions and ideas. We've allowed people to: a) Sell (or pre-sell) inventions --- but those sales logically offer only the capped upside of the product itself, and nobody will leverage themselves to get access to that upside. b) Join as a part-time employee an affiliate sales program for an invention --- this sometimes does involve leverage (and when it does, that's when you see companies settling like Herbalife did), but there's also a time commitment that mitigates the risk. c) Solicit investment from accredited investors who, by dint of substantial resources, are presumed to be sophisticated enough either to evaluate the investment or to not be subjecting themselves to existential financial risk by participating. d) Solicit investment from the public after completing onerous compliance and disclosure programs. What's being discussed today is something in between (c) and (d), where investments can be marketed directly to the public, to people we cannot presume to be sophisticated or financially secure, with virtually none of the disclosure and compliance requirements of a public company. It's reasonable to be skeptical of this.
tptacek 10y ago
Yes, but companies probably shouldn't have the right to market those poor investments, which is what the pre-crowdfunding rules said: you're entitled to start a company of any conceivable viability, and you're even entitled to collect investments for that company from non-accredited investors, but you can't offer (market) those investments to the general public without significant financial disclosures.
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- deleted 10y ago
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So is the flip side true? Do I have the right to clean out your parents bank account and get them to get a second mortgage on their house and give it to me, and then tell them, "Oh wait, it wasn't free energy after all, it was something else. Well, fail fast that's my motto. See ya!"

Moshe_Silnorin 10y ago
That's fraud not crowdfunding. If it's a sincere attempt to start a business, crowdfunding seems like a fine idea. Though I agree, it is a lemon market and I wouldn't participate myself. Many people will lose money doing this, but the cost of freedom is some people will make poor investments.
- tptacek 10y ago
  If it's practically impossible for the median consumer investor to tell the difference between a fraud and a legitimate crowdfunding opportunity, of what use is it for us to rhetorically isolate the frauds from our discussion?
  - maverick_iceman 10y ago
    The point is not whether the investor can tell the difference between fraud and poor investment. It is rather whether an actual fraud was committed as determined by a court of law. Investors should do their due diligence anyway.
    - tptacek 10y ago
      But that's not how publicly traded companies work. In practice, it's difficult to go public without substantial revenue, and your numbers have to be audited and disclosed through SEC-approved processes. Combined, these two factors have the effect of keeping most outright scams out of the major markets. Equity crowdfunding eliminates both of those guardrails. So it's reasonable to ask how effective they'll be (at generating returns for retail investors) given the obvious issue of fraud (and incompetence).
- ChuckMcM 10y ago
  And this is exactly the ugly place where reality collides with the way we wish things were. I worked for a guy once who could put together a story so plausible that someone close to you would invest way more than they had any reason to or should, into the venture. He would not tell a single outright lie and the "truth" would be that if all the things that needed to happen, did happen, the business would in fact be a great investment. He would have a sold your parents so hard that they are probably getting their friends to come in on the deal too. And when all the money was gone and your parents were destitute, he would have an iron clad story about how it was not his fault, how your parents knew that things could go wrong, and that risk was all part of the equation. He would be untouchable as far as a fraud prosecution goes. Remember the 'startup story' we read here? [1] This CEO convinced his employees to cover payroll, you don't think he couldn't convince your mom? I hope you (or someone you care about) never experiences a really good con artist first hand because it completely shakes your belief in humanity to the core. These people will take everything you have if you let them, and they will do it without hesitation. This is how it goes; Your family member or friend calls you to tell you that they just got in on a really good deal. They are going to be rich and you can be too. They will tell you how this company their new friend is the owner/CEO/president of has discovered some new product/bitcoin/algorithm/process/material that is going to disrupt some multi-billion or multi-trillion dollar a year industry. They will have some really great story about either how the information was suppressed or some "unknown genius" that they befriended/are/know came at it from a completely new direction and the world was going to change overnight. They just need some money to get their first prototype demonstrable and bam the value of your investment will grow by 100x easy. Now you ask them about it and find a lot of things that you find suspicious so you ask them to ask questions. If the questions are too pointed the prankster will threaten them with not taking their money (and so losing out on this huge reward) and if they have bought the story they will shut up. The trick here is they think they are already rich because they are convinced it is such a sure thing. And no amount of reasoning from you will change their mind. When it finally is revealed that the money is gone and the "company" is shutting down, there will be a set of things that happened that appeared to be either extremely unlikely or extremely rare. In one story the "technical cofounder" who had all the secret sauce in their head was killed in a freak car accident in Russia while visiting their family to bring them back to the US. The crowd funding site will be set up with layer after layer of warnings that you can lose all your money, and there won't be a single shred of printed information that could prove that the people responsible didn't believe what they were saying when they convinced your loved ones to invest. Bottom line, you won't be able to prove fraud, people you care about may have had their entire life's savings taken and are now living in poverty on government benefits, and there will be nothing you can do about it. The only things that stands between these fraudsters and your grandmother are the Qualified Investor rules. [1] https://medium.com/startup-grind/i-got-scammed-by-a-silicon-valley-startup-574ced8acdff#.s6q01akcm https://medium.com/startup-grind/i-got-scammed-by-a-silicon-...
sdfuu779 10y ago
Feel a bit of hay fever coming on. Depends on what you mean by "Do I have the right to clean out your parents bank account and get them to get a second mortgage on their house..." If they decide to invest in something and have to do those things to get cash and it goes bad, oops on them. If you commit fraud and get access to their financials and clean them out, oops on you. We give a lot of leeway for people to solicit support of new inventions and ideas. There also happens to be a lot of pyramid schemes and similar get rich quick scams. I don't have a fool proof way for seeing a scam from a score. If a kickstarter has specific data, date targets, shows they've done some work and made connections, I am more inclined to have a go. If someone is saying "Get your friends to sell tupperware, you'll be rich in no time!" with little detail otherwise, I'll laugh and say no thanks.
- tptacek 10y ago
  We actually have not, for the last 80 years or so, given a lot of leeway for people to solicit support of new inventions and ideas. We've allowed people to: a) Sell (or pre-sell) inventions --- but those sales logically offer only the capped upside of the product itself, and nobody will leverage themselves to get access to that upside. b) Join as a part-time employee an affiliate sales program for an invention --- this sometimes does involve leverage (and when it does, that's when you see companies settling like Herbalife did), but there's also a time commitment that mitigates the risk. c) Solicit investment from accredited investors who, by dint of substantial resources, are presumed to be sophisticated enough either to evaluate the investment or to not be subjecting themselves to existential financial risk by participating. d) Solicit investment from the public after completing onerous compliance and disclosure programs. What's being discussed today is something in between (c) and (d), where investments can be marketed directly to the public, to people we cannot presume to be sophisticated or financially secure, with virtually none of the disclosure and compliance requirements of a public company. It's reasonable to be skeptical of this.

tptacek 10y ago

Yes, but companies probably shouldn't have the right to market those poor investments, which is what the pre-crowdfunding rules said: you're entitled to start a company of any conceivable viability, and you're even entitled to collect investments for that company from non-accredited investors, but you can't offer (market) those investments to the general public without significant financial disclosures.

deleted 10y ago
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