
Crowdfunding bill would expose investors to swindles - eaurouge
http://www.baltimoresun.com/business/money/bs-bz-hancock-crowdfunding-danger-20111112,0,1311905.column
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Eliezer
I wanted to scream out loud while reading this. This. This is why we can't
have nice things. BECAUSE NOBODY CAN TOLERATE RISK ANYMORE.

YES, if you make investing possible, some investors may get exposed to
swindles! Deal with it! It's worth it for investing to be possible!

~~~
patio11
It doesn't even address the main risk of the bill, which is that grandma isn't
going to get swindled, she's just going to get sold an investment product with
hugely negative capital returns about 90% of the time _when executed correctly
by talented, honest individuals._

I mean, that has to be the debate, right? Do we allow small, private investors
access to investments with a bimodal distribution of outcomes, and if so what
amount of regulatory overhead do we impose? With the understanding that every
additional quanta of regulatory overhead a) kills some would-be companies at
the margin and b) makes some deals inaccessible to small private investors at
the margin.

~~~
nirvana
Think about the phrase "do we allow". I ask, what right do "you" have to stop
me from investing my money wherever I like?

I could go to a casino and blow $20,000 in a weekend. You're telling me that I
can't put it into a startup that takes 2 years to fail? Hell, even if I _know_
its going to fail, getting a board seat there and doing my darndest to help it
not fail might be worth $20k for me. Or, say its my best friend from high
school, whose always had this crazy idea, he's been plugging away for a decade
at it, and he wants to make it happen... I believe in him and want to put up
my $50k, $500k, $1M, $5M, whatever. We both know that its a longshot, but if
it works, its worth $5B. Who are "you" to say that I can't spend _my_ money
that way?

The fundamental problem is not risk. Its this idea that government gets to
decide who gets to invest.

They don't do this to protect people from risk, but to keep small investors
out of these types of investment. All of this kind of regulation is not to
protect people-- that's just the pitch. "won't anyone think about the
children?"

Like all regulation the real purpose of this is to protect the larger
entities-- the Venture Capital firms and the angels, from competition. And of
course, politicians get money by threatening to change the regulations-- I'm
sure this crowd funding bill has already raised a great deal of funds for the
politicians who are using its passage as a threat against those who would lose
the protection from competition.

Imagine if I could be an angel!

I have enough from a previous exit to have put small amounts-- YC level seed
funding-- into 10-20 startups. Assuming one of them was successful, I'd have a
sustainable seed fund there.

But I'm not able to be accredited given the way the law is written, and I know
there are a lot of other people in my position.

Also, for what its worth, I am able to deal with extremely risky investments--
Well out of the money stock option spreads where the upside is %500 and the
downside is a %100 loss. I've done this for years, and have consistently made
money at it. I'm pretty sure picking startups would be easier, but even if I'm
wrong....

Isn't it MY money to risk?

(not attacking you, just using your choice of phrase as a springboard-- people
think this is something legitimate to regulate, but it is not. There are
casinos across the country. This regulation is nonsense, and its immoral. Who
is the government to tell me how I can spend my money? By what right?)

~~~
DanielBMarkham
The Las Vegas example is the one I use also. I could get on a plane, go to
Vegas, spend every last penny I have, borrow all I could and spend it, and
what happens? Nothing. People might tell me how stupid I was. Yet if I do the
same thing with startups, somehow I've been swindled and the public has an
interest in protecting me.

Huh? So how about if I created a roulette game where you spin a wheel and one
time out of 50 you get in on a hot startup. The other times you lose your
money. Would that be acceptable?

I read the article, desperately trying to find something redemptive. I think
the key statement is here:

 _..."The idea that a company could do this with no oversight is frightening
because there are plenty of people out there who are willing to separate
investors from their money," says Melanie Senter Lubin, Maryland's securities
commissioner. "We are concerned about anything where investors have the
potential of losing money or where they're making an investment without the
information they need to make an informed investment decision."..._

So you put a up big huge disclaimer that says you have an extremely small
chance of ever seeing your money again.

I think that pretty much covers it, doesn't it? How much more informed do we
have to be to spend our own money?

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achille
Everyone here seems to reject the argument outright. I agree we need
crowdsourcing, but it needs to be done right. Crowdfunding was once legal,
this led to all sorts of scams and lots of elderly losing their retirements.
This is what led to the current SEC requirements of 1+M net worth
accreditation and the 499 max investors cap.

It's definitely possible to do, _BUT IT IS HARD_. Here are some ways _YOU_ as
the entrepreneur could be in trouble:

* Think of the nightmare of having 1000+ investors in your startup.

* Every unhappy investor is a potential liability. Now think of one of those investors loving your idea, pouring his life savings (Say 200K) then filing a suit in case the startup fails.

* Investing is not a simple "here's $20,000K give me whatever that's worth in stock". The shares can be voting/nonvoting, privileged non/privileged etc. Will there be protection attached?

* Your horrible idea could be funded. Think of startup ideas your uncle Vinny gives you, now imagine him investing in them. Smart investors shred bad ideas in minutes.

* You miss out, on a lot. A startup doesn't just need money, it needs well connected investors. For example, see why Asana still needs investors even though Dustin is a billionaire: [http://www.quora.com/Asana/Why-would-Dustin-Moskovitz-need-i...](http://www.quora.com/Asana/Why-would-Dustin-Moskovitz-need-investors-if-hes-worth-over-1-billion-from-Facebook-stock)

There'a a reason the SEC was created. And the other side of the argument needs
to be heard and addressed, not dismissed outright.

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corin_
_says Melanie Senter Lubin, Maryland's securities commissioner. "We are
concerned about anything where investors have the potential of losing money or
where they're making an investment without the information they need to make
an informed investment decision."_

One of us hasn't understood what an investment is, and I think it's her not
me.

~~~
tptacek
You're deliberately and hyperbolically misreading her statement. She isn't
"concerned" about the concept of risk; she is saying, "we are paying extra
attention to vehicles where there is significant risk of normal people losing
significant money".

~~~
corin_
Yeah sorry, I'm a huge fan of hyperbole. And while I was using that, my point
wasn't really to suggest that she doesn't understand what an investment is,
more that her statement made no sense.

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tomjen3
Well yes, if you don't use your head.

Falling for these kind of swindles have always been possible and as an
investor you can, and should, ask for whatever information you feel you need.
The fact that there is no longer an official requirement for what to show
doesn't mean that it isn't still fraud to show something that is false (so
even if the books haven't been audited if they contain false information, they
still go to jail). It can still happen to you today, the guys just have to
fake the audit as well.

On the other hand, how much information do you really require to invest in
bingocardcreator.com or bobs burgers?

~~~
westbywest
Indeed, there are no shortage of swindles out there, according to the most
recent review of my Spam folder. There is already an appreciable amount of
awareness out there of what are probably scams. Besides, there are already de-
facto, and generally arbitrary, limitations imposed presently by popular
crowd-funding services, e.g. Kickstarter. Kickstarter in particular seems to
turn down applications it considers too entrepreneurial, and they do so
inconsistently.

Perhaps this bill, albeit adjusted with some sensible yet minimal regulatory
scheme, would permit crowd-funding schemes otherwise impossible. It could at
least help encourage consistency in how crowd-funding could be (or not be)
regulated.

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jphackworth
As opposed to Goldman Sachs, which would never expose investors to swindles?
Give me a break. The powers that be oppose crowdfunding because the financial
industry jealously defends their legal barriers to competition, not because
they're looking out for the common man.

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malandrew
The solution to solving the "swindles" problem will be reputation. With the
internet it's possible to record an incredible level of detail regarding the
reputation of people seeking investments and the business they are building
(if it already exists).

If swindling becomes a problem, you can be sure that the market will work to
provide a solution to that problem.

~~~
ScottBurson
I'd like to think so, and it certainly would be nice if it turned out that
way, but it's not entirely clear to me that that's inevitable.

A difference between investments of this kind and ordinary purchase
transactions is that in the latter situation, the business selling the product
expects to have repeat business. That is, there's a cycle wherein the business
can sell a product, and the purchaser's reaction to the product can propagate
through the market to influence subsequent transactions.

In the case of an investment like this, however, the good being purchased,
which is a future return, may not even be expected to be produced for years
after the transaction occurs. There's no chance for the information cycle to
work; all the investment occurs up front. A swindler may not even need to
establish a positive reputation to attract investment; a good story would
likely suffice. Indeed, that's the whole point, isn't it?

I like the idea, but I think the per-person limits should be reduced by a
factor of 10, maybe even 100. That won't lock swindlers out, but it will force
them to work quite a bit harder.

~~~
wmf
OTOH, a person who gets relieved of $100 is not going to ask too many
questions about how it happened, encouraging the "entrepreneur" to try again.
Someone who lost $10,000 might lawyer up.

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cheez
Yeah because Enron and Worldcom were small ripples in an ocean.

Edit: Also financial crisis.

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sandieman
and coming from startup mecca of baltimore.. oh wait.

