4 ms·

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

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.
- InclinedPlane 15y ago
  What's wrong with "bush league"? There's plenty of room at the bottom, kickstarter has already proven that unambiguously.
Retric 15y ago
Well nothing is going to prevent any investment from becoming worthless. Investing in early stage startups has historically been incredibly risky and rarely returns your original investment. The brilliant (IMO) thing that the senate added is linking how much you can put in with your income which limits the damages. A few people get rich from strait up gambling, many have a good time and gain or lose a little money, and a few get destroyed financially. I suspect the same can be said with this type of investing and I think the net benefit to society is going to be worth the downsides. Getting back to what you said, some people will commit strait up fraud and some of them will end up in jail. But, overall with these changes I don't think fraud is going to be more of an issue than it already is.
InclinedPlane 15y ago
What's to prevent "pump and dumping" of public companies? It still happens, even if there are forces keeping it in check. Ideally a startup seeking crowd funding is more open and transparent than a larger company would be, and investors would be more knowledgeable about the company. Additionally, in some ways "pump and dump" is more obvious with smaller companies, you can't easily hide among a large volume of anonymous transactions. Make no mistake, there will be fraud, there will be pump and dump schemes, there will be people who solicit funding then just take the money and run. But hopefully that sort of thing won't be terribly common and won't spoil the huge benefit that crowd funding could be toward getting small startups off the ground more easily than they are today.
nikcub 15y ago
pump and dump in stocks with such a small cap and ownership limitations is almost impossible (since also the stock is not liquid on a daily basis, and pump and dumps rely a lot on timing) fraud is not impossible, but that goes for anything else as well - buyer beware and diversify. do you really need or want the government assuring you that an investment is ok?

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.
InclinedPlane 15y ago
What's wrong with "bush league"? There's plenty of room at the bottom, kickstarter has already proven that unambiguously.

Retric 15y ago

Well nothing is going to prevent any investment from becoming worthless. Investing in early stage startups has historically been incredibly risky and rarely returns your original investment. The brilliant (IMO) thing that the senate added is linking how much you can put in with your income which limits the damages. A few people get rich from strait up gambling, many have a good time and gain or lose a little money, and a few get destroyed financially. I suspect the same can be said with this type of investing and I think the net benefit to society is going to be worth the downsides. Getting back to what you said, some people will commit strait up fraud and some of them will end up in jail. But, overall with these changes I don't think fraud is going to be more of an issue than it already is.

InclinedPlane 15y ago

What's to prevent "pump and dumping" of public companies? It still happens, even if there are forces keeping it in check. Ideally a startup seeking crowd funding is more open and transparent than a larger company would be, and investors would be more knowledgeable about the company. Additionally, in some ways "pump and dump" is more obvious with smaller companies, you can't easily hide among a large volume of anonymous transactions. Make no mistake, there will be fraud, there will be pump and dump schemes, there will be people who solicit funding then just take the money and run. But hopefully that sort of thing won't be terribly common and won't spoil the huge benefit that crowd funding could be toward getting small startups off the ground more easily than they are today.

nikcub 15y ago

pump and dump in stocks with such a small cap and ownership limitations is almost impossible (since also the stock is not liquid on a daily basis, and pump and dumps rely a lot on timing) fraud is not impossible, but that goes for anything else as well - buyer beware and diversify. do you really need or want the government assuring you that an investment is ok?