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Author of Rolling Stone piece is focussing on the JOBS act as an enabler for stock fraud. They don't seem to be clear on its alternate function of enabling Quic

by cstross 15y ago

Author of Rolling Stone piece is focussing on the JOBS act as an enabler for stock fraud. They don't seem to be clear on its alternate function of enabling Quickstarter-type ventures where what's being sold isn't stock in a company that is trying to bypass accounting norms for an IPO, but a one-off product development (like the movie "Iron Sky", or any number of items on Quickstarter). It's a totally different business model. (Random example: let's say I, as an author, announce that I'm going to write and sell a book if I can get enough pre-purchases; let's set the gate at 10,000 readers willing to pony up $10 each in order to receive an ebook when I've written it, a year down the line. Right now, as I understand it, if I was in the US I'd be expected to undergo the same accounting procedures as a corporation prepping for an IPO because of the number of people involved -- which would make it a non-starter: the accountant's bill alone would exceed the total revenue, especially as writing a book is a one-off project. The JOBS Act is supposed to relax that requirement for the sort of venture I'm describing. But Taibbi doesn't seem to get this at all.)

leot 15y ago
Just because a piece of legislation has a nice feature doesn't mean it can't be horrible for its other properties.
- cstross 15y ago
  Absolutely correct! But it still seems to me that Taibbi is focussing on one particular aspect of it without any indication that he noticed the other angle.
  - Avshalom 15y ago
    Taibbi focused on the aspect of the JOBS act because the angle you propose is already legal and the advertised angle (kickstarter for IPOs) is (as far as he and others are concerned) just a veneer used to sell it to the rubes.
- sanderjd 15y ago
  Similarly, just because a piece of legislation has a horrible feature, doesn't mean it can't be fantastic for its other properties. Fraud exists. Fraud will exist after this bill goes into effect. So will non-fraudulent business models and investment opportunities that were unworkable before the bill. Does the benefit of those new opportunities outweigh the cost of the increased fraud potential? I think so, perhaps you think not, neither of us know for sure. What I do know is that I worry more about the entire economy being destroyed by the current powers that be through both fraud and simple incompetence than I worry about losing money to fraudsters preying on unaccredited investors like myself, and I very much look forward to having the opportunity to do so.
DennisP 15y ago
I'm a fan of the JOBS Act but doesn't the existence of Kickstarter imply that your scenario was already legal?
- masonhensley 15y ago
  From my understanding, pre JOBS act, you could not use something like kickstarter to sell equity in your company (especially bc investor accreditation issues.) Kickstarter has been used for preorders/donations. Post JOBS act, I believe a tool like kickstarter could be used to sell micro portions of equity in a company.
  - lysol 15y ago
    Kickstarter specifically excludes businesses, leaning towards projects only. I don't think they specifically preclude offering equity, however.
    - tlholaday 15y ago
      Kickstarter offers no recourse to participants. Whatever equity is, it is not a no recourse payment.
    - jeremyarussell 15y ago
      Just to clarify. Taken from http://www.kickstarter.com/help/faq/kickstarter%20basics#DoesKickTakeSomePercOfOwneOrIntePropOfThinMadeThroKick http://www.kickstarter.com/help/faq/kickstarter%20basics#Doe... "Does Kickstarter take some percentage of ownership or intellectual property of things made through Kickstarter? Absolutely not. Project creators keep 100% ownership of their work." If I'm not mistaken in this context I'm pretty sure "percentage of ownership" is synonymous with equity. At least the way equity as a word is being used in the context of this conversation. Edit: Clarification
    - BHSPitMonkey 15y ago
      IndieGoGo, one of the big competitors to Kickstarter, is a better example. It actually has a category for Small Businesses and doesn't limit what kinds of projects are allowed on the site like Kickstarter does. They do, however, explicitly disallow offering equity as a contribution reward because of the very issue the JOBS act is about. From their FAQ: "What violates our terms? - Offering any monetary return on investment or real property, including: real estate, annuities, lottery contracts, profit-sharing, cash, securities, equity or debt-repayment" The site actually had some excited-sounding announcement about the JOBS act recently, but I can't seem to find it.
wpietri 15y ago
I don't think product pre-orders are regulated like that. For the SEC to have some jurisdiction, I think you'd have to be promised a share of the company or the eventual profits. I do think the JOBS Act has been touted as enabling Kickstarter-like things where you actually invest in the enterprise, though: money can be raised from small-net-worth individuals as long as the sums are modest.
- InclinedPlane 15y ago
  Yup, that's right. Kickstarter already operates in the clear. What JOBS enables is kickstarter with equity involved. That opens up a lot more opportunities. Consider the case of someone who wants to launch a small business to do something that can't be doled out in small chunks to backers. Let's say I want to build a better wheelchair, for example. Well, even if people can tell from my descriptions and existing work that I really know what I'm doing and have a fantastic idea, few people actually need a wheelchair. So with the kickstarter model this could be a tough project to get going, but if equity could change hands it could be a lot easier. Yes, there's going to be fraud with this, lots and lots of fraud. But there's already a lot of fraud in the market. It's not important to attempt to eliminate fraud, it's more important to make sure people have enough information to know when they're doing something risky. On the whole I think it's vastly better for everyone if we enabled startups at the low end at the risk of widespread small scale fraud than if we keep everyone's investments locked away with the "too big to fail" companies where large scale fraud and malfeasance has the potential to topple governments and destabilize the world economy.
  - deong 15y ago
    > It's not important to attempt to eliminate fraud, it's more important to make sure people have enough information to know when they're doing something risky. I suspect it's at least as hard to do the latter as it is to do the former, and almost certainly harder. At least with the regulatory framework in place, the person you have to con is a professional auditor. Without that regulation, it's going to be trivially easy to con the average investor.
gcb 15y ago
everytime i browse kickstarter-like sites I keep wondering how that affect tax. i'm buying a book from this guy, but it's not a product still, as he will work on it. but it's not service either, because i have no say on what he will write. and i will get a book in the end, so it's a product. unless he never get's to write it. oh well, one more experience ruined by tax filling month paranoia.
- rhubarbquid 15y ago
  When you order a pizza it doesn't exist at the time you order. That doesn't change the fact that you're purchasing a product. Though I think with kickstarter you're technically making a donation. Either way I don't see how that could affect your taxes (other than sales tax) unless you're backing something you want use as a deduction...
  - gcb 15y ago
    Donation is very different from purchase. but i was thinking mostly for the guy receiving the money. There's then a distinction for selling and servicing. The pizza analogy is not that fitting, because there's no wording saying the pizza may not materialize.
el_presidente 15y ago
Author of Rolling Stone piece is focussing on the JOBS act as an enabler for stock fraud. That's because, at this point in time, fraud should be the focus of anything related to the financial sector.

by cstross 15y ago

leot 15y ago

Just because a piece of legislation has a nice feature doesn't mean it can't be horrible for its other properties.

cstross 15y ago
Absolutely correct! But it still seems to me that Taibbi is focussing on one particular aspect of it without any indication that he noticed the other angle.
- Avshalom 15y ago
  Taibbi focused on the aspect of the JOBS act because the angle you propose is already legal and the advertised angle (kickstarter for IPOs) is (as far as he and others are concerned) just a veneer used to sell it to the rubes.
sanderjd 15y ago
Similarly, just because a piece of legislation has a horrible feature, doesn't mean it can't be fantastic for its other properties. Fraud exists. Fraud will exist after this bill goes into effect. So will non-fraudulent business models and investment opportunities that were unworkable before the bill. Does the benefit of those new opportunities outweigh the cost of the increased fraud potential? I think so, perhaps you think not, neither of us know for sure. What I do know is that I worry more about the entire economy being destroyed by the current powers that be through both fraud and simple incompetence than I worry about losing money to fraudsters preying on unaccredited investors like myself, and I very much look forward to having the opportunity to do so.

DennisP 15y ago

I'm a fan of the JOBS Act but doesn't the existence of Kickstarter imply that your scenario was already legal?

masonhensley 15y ago
From my understanding, pre JOBS act, you could not use something like kickstarter to sell equity in your company (especially bc investor accreditation issues.) Kickstarter has been used for preorders/donations. Post JOBS act, I believe a tool like kickstarter could be used to sell micro portions of equity in a company.
- lysol 15y ago
  Kickstarter specifically excludes businesses, leaning towards projects only. I don't think they specifically preclude offering equity, however.
  - tlholaday 15y ago
    Kickstarter offers no recourse to participants. Whatever equity is, it is not a no recourse payment.
  - jeremyarussell 15y ago
    Just to clarify. Taken from http://www.kickstarter.com/help/faq/kickstarter%20basics#DoesKickTakeSomePercOfOwneOrIntePropOfThinMadeThroKick http://www.kickstarter.com/help/faq/kickstarter%20basics#Doe... "Does Kickstarter take some percentage of ownership or intellectual property of things made through Kickstarter? Absolutely not. Project creators keep 100% ownership of their work." If I'm not mistaken in this context I'm pretty sure "percentage of ownership" is synonymous with equity. At least the way equity as a word is being used in the context of this conversation. Edit: Clarification
  - BHSPitMonkey 15y ago
    IndieGoGo, one of the big competitors to Kickstarter, is a better example. It actually has a category for Small Businesses and doesn't limit what kinds of projects are allowed on the site like Kickstarter does. They do, however, explicitly disallow offering equity as a contribution reward because of the very issue the JOBS act is about. From their FAQ: "What violates our terms? - Offering any monetary return on investment or real property, including: real estate, annuities, lottery contracts, profit-sharing, cash, securities, equity or debt-repayment" The site actually had some excited-sounding announcement about the JOBS act recently, but I can't seem to find it.

wpietri 15y ago

I don't think product pre-orders are regulated like that. For the SEC to have some jurisdiction, I think you'd have to be promised a share of the company or the eventual profits. I do think the JOBS Act has been touted as enabling Kickstarter-like things where you actually invest in the enterprise, though: money can be raised from small-net-worth individuals as long as the sums are modest.

InclinedPlane 15y ago
Yup, that's right. Kickstarter already operates in the clear. What JOBS enables is kickstarter with equity involved. That opens up a lot more opportunities. Consider the case of someone who wants to launch a small business to do something that can't be doled out in small chunks to backers. Let's say I want to build a better wheelchair, for example. Well, even if people can tell from my descriptions and existing work that I really know what I'm doing and have a fantastic idea, few people actually need a wheelchair. So with the kickstarter model this could be a tough project to get going, but if equity could change hands it could be a lot easier. Yes, there's going to be fraud with this, lots and lots of fraud. But there's already a lot of fraud in the market. It's not important to attempt to eliminate fraud, it's more important to make sure people have enough information to know when they're doing something risky. On the whole I think it's vastly better for everyone if we enabled startups at the low end at the risk of widespread small scale fraud than if we keep everyone's investments locked away with the "too big to fail" companies where large scale fraud and malfeasance has the potential to topple governments and destabilize the world economy.
- deong 15y ago
  > It's not important to attempt to eliminate fraud, it's more important to make sure people have enough information to know when they're doing something risky. I suspect it's at least as hard to do the latter as it is to do the former, and almost certainly harder. At least with the regulatory framework in place, the person you have to con is a professional auditor. Without that regulation, it's going to be trivially easy to con the average investor.

gcb 15y ago

everytime i browse kickstarter-like sites I keep wondering how that affect tax. i'm buying a book from this guy, but it's not a product still, as he will work on it. but it's not service either, because i have no say on what he will write. and i will get a book in the end, so it's a product. unless he never get's to write it. oh well, one more experience ruined by tax filling month paranoia.

rhubarbquid 15y ago
When you order a pizza it doesn't exist at the time you order. That doesn't change the fact that you're purchasing a product. Though I think with kickstarter you're technically making a donation. Either way I don't see how that could affect your taxes (other than sales tax) unless you're backing something you want use as a deduction...
- gcb 15y ago
  Donation is very different from purchase. but i was thinking mostly for the guy receiving the money. There's then a distinction for selling and servicing. The pizza analogy is not that fitting, because there's no wording saying the pizza may not materialize.

el_presidente 15y ago

Author of Rolling Stone piece is focussing on the JOBS act as an enabler for stock fraud. That's because, at this point in time, fraud should be the focus of anything related to the financial sector.