4 ms·

So it's not that something previously illegal was legalized, nor that something previously burdensome become less burdensome. Instead more bureaucratic overhea

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
  [deleted]
- ataggart 15y ago
  "The new thing here is that soon it will be legal..." The article fails to make any mention of what precisely is currently illegal. I'm still not clear on that. What crime would I be committing today that will soon not be a crime?
  - wmf 15y ago
    Basically it's currently illegal for someone who's not a millionaire (an "accredited investor") to invest in startups.
    - joshu 15y ago
      It is illegal for the startup to take investments from non-accrdited investors under many circumstances. It's not illegal for the investor per se.
  - InclinedPlane 15y ago
    Step 1: Set up a company. Step 2: Sell equity in that company. Boom, you've just broken the law. Right now the number of intermediate steps between 1 and 2 are ENORMOUS. It's very, very difficult to do #2. The regulatory burden is significant and the limitations on who can invest and how much are also significant. Even something as simple as, say, trading 1% of your company to a friend in exchange for $100 is illegal. Your friend isn't a qualified investor, for example, and your company likely isn't set up properly to be traded. That's why we have the standard investment track that we do today. There are co-founders and employees (who can have equity) and there are angel investors and VCs. But there's not your friends and family, there's not interested individuals on the other side of the country, because those people don't meet the requirements to be "qualified" investors. Essentially, the system has been set up so that at the level below a publicly traded company investors have to prove that they aren't going to go broke by investing, they have to be rich enough so that the risk of losing investments won't risk putting them in the poor house. That's why angel investors are all rich. There's no such thing as a working class angel investor who just barely manages to take home mid 5-figure incomes per year. But with this law that's changing. You will be able to set up a company, with some hassle but not nearly as much as before, that will be able to take $100 from your friend in exchange for 1% ownership. Think about the implications of that. A site like kickstarter is very much dependent on pre-orders being a big part of the "donation" / investment aspect. But what if you could not just donate or put in pre-orders for projects on kickstarter but merely help finance them in exchange for a piece of the action? Think about all of the projects on kickstarter that you think are a really good idea and seem likely to be successful but that you don't actually want anything from. Or think about projects you would like to support and think would be hugely successful and you do want whatever they're making but you can't justify a higher level of support because the return doesn't seem worth it. Or think about projects that could potentially earn revenue but that can't easily do pre-orders. As a really "out there" example, let's say I had a new way to build giant dump trucks for mining. Pre-orders don't make sense because only a few mines are going to buy the things, but showing people that I know the business and proving I have a good idea and soliciting funding in exchange for equity and profit sharing might still be worthwhile.
antonej 15y ago
Yes, it is something that was previously illegal. Think of securities regulation in terms of the company, not the investor. For a company, it's illegal to offer securities for sale to the public without a registration statement filed with the SEC (usually called an S-1 or IPO prospectus) -- an enormous undertaking -- unless the company can qualify for an exemption. The entire point of these securities laws since 1933 has been to protect the average, "little guy" mom-and-pop investor from being swindled by fraudsters selling them pieces of the Brooklyn Bridge. The exemptions that exist have been carefully worked out to minimize the chances of that kind of thing, but you can never eliminate the risk. The reason this matters is that no matter how wise you think crowds may be, there is massive information asymmetry between entrepreneurs (who know literally everything there is to know about a new venture) and investors (who know literally nothing except what they're told). This is why unregulated markets are a prescription for disaster and the hard-core libertarian view in this area involves serious crack smoking. It's textbook Econ 101 market failure. I've written a detailed analysis of the subject at http://masht.ag http://masht.ag.

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
[deleted]
ataggart 15y ago
"The new thing here is that soon it will be legal..." The article fails to make any mention of what precisely is currently illegal. I'm still not clear on that. What crime would I be committing today that will soon not be a crime?
- wmf 15y ago
  Basically it's currently illegal for someone who's not a millionaire (an "accredited investor") to invest in startups.
  - joshu 15y ago
    It is illegal for the startup to take investments from non-accrdited investors under many circumstances. It's not illegal for the investor per se.
- InclinedPlane 15y ago
  Step 1: Set up a company. Step 2: Sell equity in that company. Boom, you've just broken the law. Right now the number of intermediate steps between 1 and 2 are ENORMOUS. It's very, very difficult to do #2. The regulatory burden is significant and the limitations on who can invest and how much are also significant. Even something as simple as, say, trading 1% of your company to a friend in exchange for $100 is illegal. Your friend isn't a qualified investor, for example, and your company likely isn't set up properly to be traded. That's why we have the standard investment track that we do today. There are co-founders and employees (who can have equity) and there are angel investors and VCs. But there's not your friends and family, there's not interested individuals on the other side of the country, because those people don't meet the requirements to be "qualified" investors. Essentially, the system has been set up so that at the level below a publicly traded company investors have to prove that they aren't going to go broke by investing, they have to be rich enough so that the risk of losing investments won't risk putting them in the poor house. That's why angel investors are all rich. There's no such thing as a working class angel investor who just barely manages to take home mid 5-figure incomes per year. But with this law that's changing. You will be able to set up a company, with some hassle but not nearly as much as before, that will be able to take $100 from your friend in exchange for 1% ownership. Think about the implications of that. A site like kickstarter is very much dependent on pre-orders being a big part of the "donation" / investment aspect. But what if you could not just donate or put in pre-orders for projects on kickstarter but merely help finance them in exchange for a piece of the action? Think about all of the projects on kickstarter that you think are a really good idea and seem likely to be successful but that you don't actually want anything from. Or think about projects you would like to support and think would be hugely successful and you do want whatever they're making but you can't justify a higher level of support because the return doesn't seem worth it. Or think about projects that could potentially earn revenue but that can't easily do pre-orders. As a really "out there" example, let's say I had a new way to build giant dump trucks for mining. Pre-orders don't make sense because only a few mines are going to buy the things, but showing people that I know the business and proving I have a good idea and soliciting funding in exchange for equity and profit sharing might still be worthwhile.

antonej 15y ago

Yes, it is something that was previously illegal. Think of securities regulation in terms of the company, not the investor. For a company, it's illegal to offer securities for sale to the public without a registration statement filed with the SEC (usually called an S-1 or IPO prospectus) -- an enormous undertaking -- unless the company can qualify for an exemption. The entire point of these securities laws since 1933 has been to protect the average, "little guy" mom-and-pop investor from being swindled by fraudsters selling them pieces of the Brooklyn Bridge. The exemptions that exist have been carefully worked out to minimize the chances of that kind of thing, but you can never eliminate the risk. The reason this matters is that no matter how wise you think crowds may be, there is massive information asymmetry between entrepreneurs (who know literally everything there is to know about a new venture) and investors (who know literally nothing except what they're told). This is why unregulated markets are a prescription for disaster and the hard-core libertarian view in this area involves serious crack smoking. It's textbook Econ 101 market failure. I've written a detailed analysis of the subject at http://masht.ag http://masht.ag.