8 ms·

Crowdfunding passed in the Senate and here's what they changed

26 points by vnchr 15y ago

Mizza 15y ago
> SEC-registered crowdfunding portal. This is interesting to me. Where can I find more information about the specifics of this?
- littlegiantcap 15y ago
  I'm actually working on a crowdfunding for equity site that we're going to be launching here in the next couple of weeks. I had the opportunity to read the bill and it stipulates that those of us acting as crowdfunding intermediaries be either broker dealers or this new class of financial institution called a "funding portal" From here on this is pure speculation. Basically, the gist that I've gotten from the various SEC officials making comments on the bill is that a funding portal is going to a be very loosely regulated compared to other financial intermediaries. Mostly funding portals will exist as a way for the SEC to keep tabs on us to prevent fraud, and to make sure we're meeting all our various reporting requirements to the Federal and State level governments. Again, all of this is speculation based off of the various committee hearings, and comments from SEC higher ups regarding the crowdfunding bill. Edit: I also should have included that the SEC is using "funding portal" as a way of limiting the scope of our activities. It prevents us from doing things like actually performing the money management functions etc.
- vnchr 15y ago
  Here is the section of the amendment that deals directly with those requiremennts: http://thomas.loc.gov/cgi-bin/query/F?c112:1:./temp/~c112pnEReu:e21242 http://thomas.loc.gov/cgi-bin/query/F?c112:1:./temp/~c112pnE...: I'm still dissecting it.
JumpCrisscross 15y ago
“For investors with an income of less than $100,000, investments will be capped at the greater of $2,000 or 5% of income. For investors within an income of more than $100,000, investments will be capped at 10% up to $100,000.” Is the cap per investment or per person? E.g., if I make 100k, does that mean I can invest 5k total, or no more than 5k in any one company? Also, is this an annual cap? What happens if I invest in January and the investment appreciates (or depreciates)? Does my cap move with MtM, or just record the cost? Finally, isn't the "10% up to 100k" part redundant, since someone who is earning 1 million is an accredited investor by the traditional definition? Or is the 100k similar to the 2k, in that it's one part of a greater of function?
- waterlesscloud 15y ago
  From the bill- (B) the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, does not exceed-- `(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and (ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000; EDIT- Wait, what if say your income is $150k but your net worth is only $80k? Section one says it applies if either net worth or income is less than $100k, but section two says it applies if either is greater than $100k. Hmmm.
  - JumpCrisscross 15y ago
    So Grandma with $50k could invest in 25 start-ups at $2k each? I suppose if they each have at least a 8% probability of more than 10-bagging it...
    - mbreese 15y ago
      No, she could invest $100 in 25 startups or $2500 total (5% of $50K). The limit was on total investment.
  - mbreese 15y ago
    There are lots of people who don't have income, but have lots of net worth - they aren't worried about the reverse case. If your net worth is more than $100K, or make $100K, then you are in (ii). You are still allowed only 10% though to invest (in total). So, if you have a net worth of $1M, you'd be capped at $100K invested per year.
- ojbyrne 15y ago
  I'm not an expert on any of this, but since it is talking about annual income, I'd assume the limits are also annual limits.
sudonim 15y ago
Can anyone explain why 25 Democrats + Bernie Sanders (Independent) voted against the bill? http://politics.nytimes.com/congress/votes/112/senate/2/55?ref=business http://politics.nytimes.com/congress/votes/112/senate/2/55?r... Do they want to protect unsophisticated investors from being tricked? It seems like it's a really positive movement in support of small, innovative businesses.
- tptacek 15y ago
  Yes; it rolls back investor protections. To understand the concern (you don't have to agree with it to understand it), stop assuming that all or even most of the people who take advantage of Crowdfunding will be businesses run in good faith, or that there will be any effective way to impute reputations to all, most, or even any of the people offering equity on these sites.
  - wheelerwj 15y ago
    it does make sense that the role of policing will have to be done on the portal owner's end. Brand Reputation, Success, etc. People were skeptical of Kickstarter at first but look at how it has flourished.
    - tptacek 15y ago
      Kickstarter isn't an investment vehicle. You don't put your money into Kickstarter hoping for a financial return.
      - wheelerwj 15y ago
        you do expect some kind of return though. It just comes in a different form. You don't go to kickstarter and say, "oh hey, ill just piss away 25$ because this guy seems nice...." plus kickstarter has its own vetting process.
  - littlegiantcap 15y ago
    To be fair people said the same thing about ebay. Any sort of quality crowdfunding site will be able to prevent fraud through a mix of identity verification and leveraging their users expertise to weigh in on a businesses viability. (At least that's the model we're using)
wheelerwj 15y ago
this is pretty exciting. Although, I am still curiou about the portal and timeline for this.
tptacek 15y ago
How much does this really change the game for any company that long-term thinks it may take VC money? Doesn't stuff like this crud up cap tables and drastically increase the legal cost of obtaining the protections VCs typically demand? Won't the best prospects among startups avoid crowdfunding, creating an adverse selection problem among available companies to fund through it?
- JumpCrisscross 15y ago
  Friends and family money doesn't seem to interfere with VC activity too much - this is just conditionally broadening the definition of friends and family.
- littlegiantcap 15y ago
  Yes and no. The thing is that Crowdfunding investors are not counted among your investor limits. The trick is structuring the terms in a way that you can restrict voting rights and enact forced buybacks, etc. on your crowdfunded investors to clean up that capital structure as you move forward with another series of investment.
- wmf 15y ago
  Yes, it seems like "crowd money" is another form of dumb money, which many people say entrepreneurs shouldn't bother taking. Crowdfunding really plays to the "misunderstood genius who the angel establishment refused to fund" story. Of course, we're all probably thinking about silicon valley style startups. It's possible that crowdfunding will be used for lifestyle businesses as well (not that that's a good idea either).
  - tptacek 15y ago
    I think the "dumb money" meme deserves some suppression too. Also, after a few seconds more thought: one reason current low-net-worth investors are a problem with VCs is that they're unaccredited, and unaccredited investors incur liability for companies (as I understand it they can more or less claim at any moment to have been ripped off by the company). That's not a problem you have if the investments are explicitly aboveboard.
nextparadigms 15y ago
Will this make Kickstarter illegal in any way? I mean are people still free to give money (capped of course) without having to receive stock in return?
- tptacek 15y ago
  Kickstarter isn't an investment vehicle.
jellicle 15y ago
This sounds like an excellent - and legal! - way to fleece the public with fake startup companies. If you have a legit company, you better get in now, because it won't be long before a wave of scammers is busy promoting their new "give us $2,000 and MAKE MONEY FAST! Approved by Congress!" schemes. Those of you who have flexible ethics should consider it yourselves. For a couple thousand dollars you can easily work up a website and suitable promotional materials, form a corporation and so on, and then you just wait for the money to roll in. Cure for cancer! Spaceship to Mars! Cold Fusion! Doesn't really matter, just make sure you emphasize that the investment may not pay off. If you can keep it going for a while it should provide an excellent source of income for a couple of years, before you regretfully announce bankruptcy.
- wheelerwj 15y ago
  That is a bit dramatic. I don't see how this opens people up to any additional scams than are already out there. What it does is provide another avenue to get money from people who have it into the hands of the people who need it. It's like y-combinator for the little guy.
  - jellicle 15y ago
    Yep, that will be exactly the angle to push. You too can get rich just like venture capitalists, with as little as $2,000 down! It will just be a sad, unhappy coincidence that none of their investments ever pay off. Oh, too bad, you just got unlucky. But if you put another $2,000 into my next company, we're definitely going to make you rich, rich, RICH!
- littlegiantcap 15y ago
  Or you know, it could open up new funding options for startups and small businesses. The truth is that a well built crowdfunding site can prevent fraud pretty easily.
- nickfromseattle 15y ago
  From what I understand, people that raise a significant amount of money via kickstarter/crowdsource usually do so from their own, already established communities. If these people are in it for a quick buck, its likely they wont have the community necessary to raise any significant amount of money.

26 points by vnchr 15y ago

Mizza 15y ago

> SEC-registered crowdfunding portal. This is interesting to me. Where can I find more information about the specifics of this?

littlegiantcap 15y ago
I'm actually working on a crowdfunding for equity site that we're going to be launching here in the next couple of weeks. I had the opportunity to read the bill and it stipulates that those of us acting as crowdfunding intermediaries be either broker dealers or this new class of financial institution called a "funding portal" From here on this is pure speculation. Basically, the gist that I've gotten from the various SEC officials making comments on the bill is that a funding portal is going to a be very loosely regulated compared to other financial intermediaries. Mostly funding portals will exist as a way for the SEC to keep tabs on us to prevent fraud, and to make sure we're meeting all our various reporting requirements to the Federal and State level governments. Again, all of this is speculation based off of the various committee hearings, and comments from SEC higher ups regarding the crowdfunding bill. Edit: I also should have included that the SEC is using "funding portal" as a way of limiting the scope of our activities. It prevents us from doing things like actually performing the money management functions etc.
vnchr 15y ago
Here is the section of the amendment that deals directly with those requiremennts: http://thomas.loc.gov/cgi-bin/query/F?c112:1:./temp/~c112pnEReu:e21242 http://thomas.loc.gov/cgi-bin/query/F?c112:1:./temp/~c112pnE...: I'm still dissecting it.

JumpCrisscross 15y ago

“For investors with an income of less than $100,000, investments will be capped at the greater of $2,000 or 5% of income. For investors within an income of more than $100,000, investments will be capped at 10% up to $100,000.” Is the cap per investment or per person? E.g., if I make 100k, does that mean I can invest 5k total, or no more than 5k in any one company? Also, is this an annual cap? What happens if I invest in January and the investment appreciates (or depreciates)? Does my cap move with MtM, or just record the cost? Finally, isn't the "10% up to 100k" part redundant, since someone who is earning 1 million is an accredited investor by the traditional definition? Or is the 100k similar to the 2k, in that it's one part of a greater of function?

waterlesscloud 15y ago
From the bill- (B) the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, does not exceed-- `(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and (ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000; EDIT- Wait, what if say your income is $150k but your net worth is only $80k? Section one says it applies if either net worth or income is less than $100k, but section two says it applies if either is greater than $100k. Hmmm.
- JumpCrisscross 15y ago
  So Grandma with $50k could invest in 25 start-ups at $2k each? I suppose if they each have at least a 8% probability of more than 10-bagging it...
  - mbreese 15y ago
    No, she could invest $100 in 25 startups or $2500 total (5% of $50K). The limit was on total investment.
- mbreese 15y ago
  There are lots of people who don't have income, but have lots of net worth - they aren't worried about the reverse case. If your net worth is more than $100K, or make $100K, then you are in (ii). You are still allowed only 10% though to invest (in total). So, if you have a net worth of $1M, you'd be capped at $100K invested per year.
ojbyrne 15y ago
I'm not an expert on any of this, but since it is talking about annual income, I'd assume the limits are also annual limits.

sudonim 15y ago

Can anyone explain why 25 Democrats + Bernie Sanders (Independent) voted against the bill? http://politics.nytimes.com/congress/votes/112/senate/2/55?ref=business http://politics.nytimes.com/congress/votes/112/senate/2/55?r... Do they want to protect unsophisticated investors from being tricked? It seems like it's a really positive movement in support of small, innovative businesses.

tptacek 15y ago
Yes; it rolls back investor protections. To understand the concern (you don't have to agree with it to understand it), stop assuming that all or even most of the people who take advantage of Crowdfunding will be businesses run in good faith, or that there will be any effective way to impute reputations to all, most, or even any of the people offering equity on these sites.
- wheelerwj 15y ago
  it does make sense that the role of policing will have to be done on the portal owner's end. Brand Reputation, Success, etc. People were skeptical of Kickstarter at first but look at how it has flourished.
  - tptacek 15y ago
    Kickstarter isn't an investment vehicle. You don't put your money into Kickstarter hoping for a financial return.
    - wheelerwj 15y ago
      you do expect some kind of return though. It just comes in a different form. You don't go to kickstarter and say, "oh hey, ill just piss away 25$ because this guy seems nice...." plus kickstarter has its own vetting process.
- littlegiantcap 15y ago
  To be fair people said the same thing about ebay. Any sort of quality crowdfunding site will be able to prevent fraud through a mix of identity verification and leveraging their users expertise to weigh in on a businesses viability. (At least that's the model we're using)

wheelerwj 15y ago

this is pretty exciting. Although, I am still curiou about the portal and timeline for this.

tptacek 15y ago

How much does this really change the game for any company that long-term thinks it may take VC money? Doesn't stuff like this crud up cap tables and drastically increase the legal cost of obtaining the protections VCs typically demand? Won't the best prospects among startups avoid crowdfunding, creating an adverse selection problem among available companies to fund through it?

JumpCrisscross 15y ago
Friends and family money doesn't seem to interfere with VC activity too much - this is just conditionally broadening the definition of friends and family.
littlegiantcap 15y ago
Yes and no. The thing is that Crowdfunding investors are not counted among your investor limits. The trick is structuring the terms in a way that you can restrict voting rights and enact forced buybacks, etc. on your crowdfunded investors to clean up that capital structure as you move forward with another series of investment.
wmf 15y ago
Yes, it seems like "crowd money" is another form of dumb money, which many people say entrepreneurs shouldn't bother taking. Crowdfunding really plays to the "misunderstood genius who the angel establishment refused to fund" story. Of course, we're all probably thinking about silicon valley style startups. It's possible that crowdfunding will be used for lifestyle businesses as well (not that that's a good idea either).
- tptacek 15y ago
  I think the "dumb money" meme deserves some suppression too. Also, after a few seconds more thought: one reason current low-net-worth investors are a problem with VCs is that they're unaccredited, and unaccredited investors incur liability for companies (as I understand it they can more or less claim at any moment to have been ripped off by the company). That's not a problem you have if the investments are explicitly aboveboard.

nextparadigms 15y ago

Will this make Kickstarter illegal in any way? I mean are people still free to give money (capped of course) without having to receive stock in return?

tptacek 15y ago
Kickstarter isn't an investment vehicle.

jellicle 15y ago

This sounds like an excellent - and legal! - way to fleece the public with fake startup companies. If you have a legit company, you better get in now, because it won't be long before a wave of scammers is busy promoting their new "give us $2,000 and MAKE MONEY FAST! Approved by Congress!" schemes. Those of you who have flexible ethics should consider it yourselves. For a couple thousand dollars you can easily work up a website and suitable promotional materials, form a corporation and so on, and then you just wait for the money to roll in. Cure for cancer! Spaceship to Mars! Cold Fusion! Doesn't really matter, just make sure you emphasize that the investment may not pay off. If you can keep it going for a while it should provide an excellent source of income for a couple of years, before you regretfully announce bankruptcy.

wheelerwj 15y ago
That is a bit dramatic. I don't see how this opens people up to any additional scams than are already out there. What it does is provide another avenue to get money from people who have it into the hands of the people who need it. It's like y-combinator for the little guy.
- jellicle 15y ago
  Yep, that will be exactly the angle to push. You too can get rich just like venture capitalists, with as little as $2,000 down! It will just be a sad, unhappy coincidence that none of their investments ever pay off. Oh, too bad, you just got unlucky. But if you put another $2,000 into my next company, we're definitely going to make you rich, rich, RICH!
littlegiantcap 15y ago
Or you know, it could open up new funding options for startups and small businesses. The truth is that a well built crowdfunding site can prevent fraud pretty easily.
nickfromseattle 15y ago
From what I understand, people that raise a significant amount of money via kickstarter/crowdsource usually do so from their own, already established communities. If these people are in it for a quick buck, its likely they wont have the community necessary to raise any significant amount of money.