4 ms·

"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

"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.
- jdunck 15y ago
  Bad example: in the given scenario, you would seek a patent and license the innovation to existing truck manufacturers. You capital worries go away. That said, I've many times been annoyed that I couldn't invest as a middle-class shmuck. Some companies I wished I could get on: AirBnB, GetAround, Occipital, Disqus, Twilio. Obviously I'm recalling w/ survivor bias, and there's no telling if those winners would have been happy to sell at a price I could afford (I don't have the juice VC/angel giants have), but I look forward to finding cos that I believe in and are happy to take my money. Edit: actually, I'll make a few prospective calls in case they want to call me: MindSnacks, Ask Your Target Market, Lovely, Beamit.

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.

jdunck 15y ago
Bad example: in the given scenario, you would seek a patent and license the innovation to existing truck manufacturers. You capital worries go away. That said, I've many times been annoyed that I couldn't invest as a middle-class shmuck. Some companies I wished I could get on: AirBnB, GetAround, Occipital, Disqus, Twilio. Obviously I'm recalling w/ survivor bias, and there's no telling if those winners would have been happy to sell at a price I could afford (I don't have the juice VC/angel giants have), but I look forward to finding cos that I believe in and are happy to take my money. Edit: actually, I'll make a few prospective calls in case they want to call me: MindSnacks, Ask Your Target Market, Lovely, Beamit.