6 ms·

Senate Passes Amended Crowdfunding Bill, Emulating Kickstarter Model

55 points by llambda 15y ago

alain94040 15y ago
I believe crowdfunding may become a very powerful trend for startups (even though criticism such as this in the SJ Mercury News is valid http://www.mercurynews.com/chris-obrien/ci_20217467/obrien-ipo-reform-spells-disaster-investors http://www.mercurynews.com/chris-obrien/ci_20217467/obrien-i...). That's the reason why there will be a panel dedicated to discussing crowdfunding at the upcoming startup conference in mountain view (http://thestartupconference.com/ http://thestartupconference.com/).
- param 15y ago
  Actually, there is very little criticism in the mercurynews article you cited about the crowdfunding. Most of the criticism is focused on other portions of the bill. Literally, all content from the article about crowdfunding is: "The crowd funding proposal has some merit. Companies could seek to raise up to $2 million through individual donations up to $10,000 each or 10 percent of a person's income..<snip>.. But in its current form, even the crowd funding piece is problematic because it provides little oversight of the process by letting just about anyone into the fundraising game." I can understand why it is 'instinctively' bad to not have any oversight into the funding process, but how is letting just about anyone into the game bad? It could even have positive impacts to startups like mine who don't have valley/VC contacts but know individuals who could spare 10k. Given that the costs of starting up have plummeted, it makes sense to allow crowdfunding while removing the auditing/legal requirements because crowdfunders would be taking lesser risk than investors of yore. Practically a certified investor (1m+) has the capability to invest in 100 startups before (s)he can invest in 1!
  - jerrya 15y ago
    "but how is letting just about anyone into the game bad?" Some params are good, some params are bad. It's not that letting anyone into the game is bad per se, it's that some params are bad and will try to defraud small unsophisticated investors and it is probably easy to do so. Congress and the SEC presumably would like to gain the advantages of crowdsourcing but also want to protect the small time $10, $50, $100, $1000, $10,000 investor.
    - param 15y ago
      not disagreeing with anything you said. I am merely pointing out that the parent posted a link that wasn't adding anything worthwhile into the crowdfunding part of the story
jerrya 15y ago
I went to a presentation about this Tuesday. What became apparent is not just that crowdfunding will open up all sorts of revenue to startups, but that it will also create opportunities for new services dedicated to the crowdfunded startup industry. Just as now we have startups whose market is startups and their needs, so too crowdfunded companies will need specific guidance and services in terms of how to structure offers, issue press releases and other information packets to deal with hundreds or thousands of small investors, respond to questions from these investors, and perform other duties different from those that are needed by startups who fund from far fewer and more sophisticated investors. I think if I knew a few financial lawyer friends and had some capital, it might be a good place to be.
- antonej 15y ago
  That description encapsulates why crowdfunding will be a last resort for many, if not most, entrepreneurs. Most founders I know would rather bootstrap and not take money from one investor, let alone hundreds. They generally go with angels for a seed round and VCs if and when they need a $1MM+ real Series A round. It's frankly a PITA dealing with a large number of investors; leanly staffed early stage startups have so many other things to worry about. I can tell you none of my clients (all of whom are entrepreneurs) are clamoring for this.
- milkshakes 15y ago
  This is what ProFounder wanted to be. Sadly they were ahead of their time.
ataggart 15y ago
So it's not that something previously illegal was legalized, nor that something previously burdensome become less burdensome. Instead more bureaucratic overhead was added, barriers to entry were raised, and all that with a nice helping of nanny-ism in the form of meagre limits to how much one shall be permitted to invest. Perhaps this will help "create jobs", but not for those who want to participate in any aspect of providing capital, borrowing capital, or facilitating such an exchange. The only jobs created will be for those who have the skills to navigate bureaucracy in order to lessen the increased deadweight loss this bill will create. Edit: apparently something was illegal, but the article failed to mention it. Still not sure what that something is.
- jerrya 15y ago
  No, I belive it was previously illegal. Investors had to be qualified in any number of ways and you couldn't accept money, especially small amounts of money as you would in crowdfunded companies, from anyone less than a sophisticated investor (net worth over $1M).
  - nikcub 15y ago
    investors both had to be accredited (easy to get around) and it was also illegal to advertise or promote a private placement (not easy to get around)
- InclinedPlane 15y ago
  Kickstarter is not crowdfunding, it's pre-orders and donations. No equity changes hands. The new thing here is that soon it will be legal to do just what Kickstarter is doing today but also add the option for supporters to purchase equity in a venture. Think: micro-IPOs. So instead of just pre-ordering the Double Fine game or getting a sweet poster or lunch with the team you could also maybe invest in, say, 2% of a company set up for the project which might net you a fincancial return if they make a profit. That sort of thing will now soon be legal. It's still limited due to the weight of excess regulation but it's a step in the right direction.
  - deleted 15y ago
mikeryan 15y ago
Can someone explain to me does "crowd funding" a startup mean I give $400 and get a piece of equity? And isnt that what I do on the stock market? Except in this case it lacks the financial oversight and disclosures of a pilublic company? What's to prevent "pump and dumping" of startups? I'm not being facetious. I've been wondering this for a few days now and feel im missing something obvious.
- antonej 15y ago
  Nothing. Well, OK, that's a slight exaggeration, but it's exactly what has securities lawyers and people like current and former SEC Chairmen shaken their heads in disbelief. The chain of transparency and accountability isn't there the way it would be with a public company registered with the SEC. I wrote a detailed critique here: http://masht.ag http://masht.ag .
- bilbo0s 15y ago
  I'm right there with you. I mean KickStarter is akin to donation. There is no expectation of getting your money back plus a return. This seems ... I don't know ... kind of bush league. Who would do this? A team might have, I don't know, thousands of potential 'investors' who they would have to keep happy. What about follow on rounds? So many people are lawsuit happy now a days as well. Just seems... I MUST be missing something.
  - eli_gottlieb 15y ago
    Kickstarter, properly done, is actually not an investment but a product purchase. You are promised a "reward" priced for how much you donated; this is a tangible product in exchange for your money.
    - Kliment 15y ago
      Except that is specifically against the kickstarter terms of service. There is no legal obligation to the seller to give you anything, whether or not it was promised as a reward. The Kickstarter FAQ tries to paste over this by talking about reputation but legally, it's simply not there. Legally speaking, a kickstarter contribution is a donation with no consideration included.
T_S_ 15y ago
Great. The idea is to reduce transparency and let mom and pop play the game. A missed opportunity to promote transparency. For most of these little companies no advantage is lost by reporting cash flow, transactions and other relevant metrics. All easy to calculate. The new services around these little companies should be accounting support. Instead all we are going to get is "social proof" followed by an info blackout.
nikcub 15y ago
So, who is working on a 'kickstarter for startups' company?

55 points by llambda 15y ago

I believe crowdfunding may become a very powerful trend for startups (even though criticism such as this in the SJ Mercury News is valid http://www.mercurynews.com/chris-obrien/ci_20217467/obrien-ipo-reform-spells-disaster-investors http://www.mercurynews.com/chris-obrien/ci_20217467/obrien-i...). That's the reason why there will be a panel dedicated to discussing crowdfunding at the upcoming startup conference in mountain view (http://thestartupconference.com/ http://thestartupconference.com/).

param 15y ago
Actually, there is very little criticism in the mercurynews article you cited about the crowdfunding. Most of the criticism is focused on other portions of the bill. Literally, all content from the article about crowdfunding is: "The crowd funding proposal has some merit. Companies could seek to raise up to $2 million through individual donations up to $10,000 each or 10 percent of a person's income..<snip>.. But in its current form, even the crowd funding piece is problematic because it provides little oversight of the process by letting just about anyone into the fundraising game." I can understand why it is 'instinctively' bad to not have any oversight into the funding process, but how is letting just about anyone into the game bad? It could even have positive impacts to startups like mine who don't have valley/VC contacts but know individuals who could spare 10k. Given that the costs of starting up have plummeted, it makes sense to allow crowdfunding while removing the auditing/legal requirements because crowdfunders would be taking lesser risk than investors of yore. Practically a certified investor (1m+) has the capability to invest in 100 startups before (s)he can invest in 1!
- jerrya 15y ago
  "but how is letting just about anyone into the game bad?" Some params are good, some params are bad. It's not that letting anyone into the game is bad per se, it's that some params are bad and will try to defraud small unsophisticated investors and it is probably easy to do so. Congress and the SEC presumably would like to gain the advantages of crowdsourcing but also want to protect the small time $10, $50, $100, $1000, $10,000 investor.
  - param 15y ago
    not disagreeing with anything you said. I am merely pointing out that the parent posted a link that wasn't adding anything worthwhile into the crowdfunding part of the story

jerrya 15y ago

I went to a presentation about this Tuesday. What became apparent is not just that crowdfunding will open up all sorts of revenue to startups, but that it will also create opportunities for new services dedicated to the crowdfunded startup industry. Just as now we have startups whose market is startups and their needs, so too crowdfunded companies will need specific guidance and services in terms of how to structure offers, issue press releases and other information packets to deal with hundreds or thousands of small investors, respond to questions from these investors, and perform other duties different from those that are needed by startups who fund from far fewer and more sophisticated investors. I think if I knew a few financial lawyer friends and had some capital, it might be a good place to be.

antonej 15y ago
That description encapsulates why crowdfunding will be a last resort for many, if not most, entrepreneurs. Most founders I know would rather bootstrap and not take money from one investor, let alone hundreds. They generally go with angels for a seed round and VCs if and when they need a $1MM+ real Series A round. It's frankly a PITA dealing with a large number of investors; leanly staffed early stage startups have so many other things to worry about. I can tell you none of my clients (all of whom are entrepreneurs) are clamoring for this.
milkshakes 15y ago
This is what ProFounder wanted to be. Sadly they were ahead of their time.

ataggart 15y ago

So it's not that something previously illegal was legalized, nor that something previously burdensome become less burdensome. Instead more bureaucratic overhead was added, barriers to entry were raised, and all that with a nice helping of nanny-ism in the form of meagre limits to how much one shall be permitted to invest. Perhaps this will help "create jobs", but not for those who want to participate in any aspect of providing capital, borrowing capital, or facilitating such an exchange. The only jobs created will be for those who have the skills to navigate bureaucracy in order to lessen the increased deadweight loss this bill will create. Edit: apparently something was illegal, but the article failed to mention it. Still not sure what that something is.

jerrya 15y ago
No, I belive it was previously illegal. Investors had to be qualified in any number of ways and you couldn't accept money, especially small amounts of money as you would in crowdfunded companies, from anyone less than a sophisticated investor (net worth over $1M).
- nikcub 15y ago
  investors both had to be accredited (easy to get around) and it was also illegal to advertise or promote a private placement (not easy to get around)
InclinedPlane 15y ago
Kickstarter is not crowdfunding, it's pre-orders and donations. No equity changes hands. The new thing here is that soon it will be legal to do just what Kickstarter is doing today but also add the option for supporters to purchase equity in a venture. Think: micro-IPOs. So instead of just pre-ordering the Double Fine game or getting a sweet poster or lunch with the team you could also maybe invest in, say, 2% of a company set up for the project which might net you a fincancial return if they make a profit. That sort of thing will now soon be legal. It's still limited due to the weight of excess regulation but it's a step in the right direction.
- deleted 15y ago

mikeryan 15y ago

Can someone explain to me does "crowd funding" a startup mean I give $400 and get a piece of equity? And isnt that what I do on the stock market? Except in this case it lacks the financial oversight and disclosures of a pilublic company? What's to prevent "pump and dumping" of startups? I'm not being facetious. I've been wondering this for a few days now and feel im missing something obvious.

antonej 15y ago
Nothing. Well, OK, that's a slight exaggeration, but it's exactly what has securities lawyers and people like current and former SEC Chairmen shaken their heads in disbelief. The chain of transparency and accountability isn't there the way it would be with a public company registered with the SEC. I wrote a detailed critique here: http://masht.ag http://masht.ag .
bilbo0s 15y ago
I'm right there with you. I mean KickStarter is akin to donation. There is no expectation of getting your money back plus a return. This seems ... I don't know ... kind of bush league. Who would do this? A team might have, I don't know, thousands of potential 'investors' who they would have to keep happy. What about follow on rounds? So many people are lawsuit happy now a days as well. Just seems... I MUST be missing something.
- eli_gottlieb 15y ago
  Kickstarter, properly done, is actually not an investment but a product purchase. You are promised a "reward" priced for how much you donated; this is a tangible product in exchange for your money.
  - Kliment 15y ago
    Except that is specifically against the kickstarter terms of service. There is no legal obligation to the seller to give you anything, whether or not it was promised as a reward. The Kickstarter FAQ tries to paste over this by talking about reputation but legally, it's simply not there. Legally speaking, a kickstarter contribution is a donation with no consideration included.

T_S_ 15y ago

Great. The idea is to reduce transparency and let mom and pop play the game. A missed opportunity to promote transparency. For most of these little companies no advantage is lost by reporting cash flow, transactions and other relevant metrics. All easy to calculate. The new services around these little companies should be accounting support. Instead all we are going to get is "social proof" followed by an info blackout.

nikcub 15y ago

So, who is working on a 'kickstarter for startups' company?